Checklist to select the right Mutual Fund

Find out more about the top-performing mutual funds available in India. Learn the following checklist before investing for the best outcomes.
March 22, 2022

Checklist to select the right Mutual Fund

Dear Reader,

Back in 2017, the ‘Mutual fund Sahi Hai Campaign’ was an eye-opener to most people who were sought after by investing in traditional financial instruments. Along with that many content creators on social media, today have contributed in making people more knowledgeable about investing in Mutual funds.

As investors, we always want to make sure we are investing in the best-performing funds, with the best ranking. But more often than not we fail to find the difference between choosing the best fund in the market and the best fund for ourselves.

We all know Mutual funds Sahi hai but “Kaunsa Mutual Fund Sahi hai?”

We believe this is a major question that needs to be addressed in order to avoid any tussle between selecting the best mutual fund and the right mutual fund. Hence, we bring to you a checklist that you should look at before investing in Mutual funds.

1) Financial goals and Investment Horizon: 

Understanding your goals is one of the major tasks! Ask yourself these questions

Do I need money to buy a car in the next 2 years?

Do I need money to build a house in 10 years?

Do I need money for my retirement in 30 years?

If your goal is short-term, let’s say up to 3 years, it would be advisable to invest in debt funds. If your goals are medium to long term and go beyond 3 years, you should select equity mutual funds. Select the fund which is most aligned with your goals. Knowing your plans and planning for them is what makes your decision easy to select a fund. 

2) Identify your risk profile:

The amount of risk you could take plays an important role while selecting a fund. 

If you are a conservative investor and do not want to participate in the fluctuations of the market, consider investing in balanced funds that will give you allocation to both debt and equity. If you are an aggressive investor and looking for a higher return in the long term, you should invest in equity mutual funds including large-cap, mid-cap, and small-cap.

3) Selecting a mutual fund scheme:

Before you select a scheme, it is necessary to select a fund category. Do you want to invest in debt-based funds, equity-based funds, or hybrid funds?  Depending on your needs, you need to find a suitable fund scheme and plan. For example, if you need regular income then it is best to select a Monthly Income Plan. If growth is your priority, then equity will be best suitable to meet your needs. Along with this, your risk ability and investment horizon are equally important.

4) Considering associated costs:

This is one of the most important parts of the fund analyzing process. After all, you would receive your profits after deducting some expenses and management fees. The expense ratio is the fees charged by the mutual fund company. A higher expense ratio is not good. Always identify the mutual fund with a lower expense ratio. The lesser the expenses, the more would be the amount attributable to unitholders. 

Sometimes, mutual fund schemes also charge you exit load if you redeem your investments within a specified period. 

5) Check for fund performance:

After selecting your scheme, now it is time to look for the past fund performance. The performance must be evaluated not only historically but also on a peer-to-peer basis. How has the fund performed over a period of time? How well did the fund perform among its peers? Moreover, you must compare the fund with the benchmark.

Every mutual fund is compared against an Index. If your mutual fund has given a 10% annual return in the last 5 years but the Index has given a 12% annual return then the fund has underperformed. If the Index has given a 5% return in the last 1 year but your fund has given an 8% return then the fund has outperformed. This comparison should be done over a long period of time.

Also, while comparing funds, make sure they belong to the same category.  For example, if you are investing in a large-cap fund, compare it with other large-cap funds and not mid or small-cap ones.

6) Fund manager skills: 

The skillset of a fund manager plays a huge role in the fund's performance. The performance of the fund is based on the fund manager's ability to perform.  Check for the fund manager who is delivering consistent returns over the past 10-15 years or from the inception of the fund. If the fund manager has recently changed, then it would be of waste to compare the fund and the manager. Instead, check for the background of the fund manager and his/her past performance and educational qualities.


7) Fund portfolio:

The elements of the funds need to be evaluated to determine the overall risk and return in the scheme. How well the fund is diversified? Which market segments have been covered in the fund? How good is the financial position of the fund? How much portion is attributable to cash and liquid securities? All these kinds of questions must be answered to know the fund in detail before making any investment decision.

Look at the top 15 holdings and find out if the fund has attempted something different. It is possible that the fund has made some bold picks. 

8) Fund size:

You must be wondering now why it is essential to see fund size. It is essential because a large fund size may be advantageous as it will offer better diversification and economies of scale. While a small-sized fund is more flexible and can adapt as per the market conditions and benefit from it. AUM of Rs.1000 crore for equity funds can be considered a good minimum threshold to evaluate a scheme of an AMC. 


9) Portfolio turnover:

A portfolio turnover showcases the investment style of the overall fund. Frequent buying and selling of securities incur a cost that affects the value of the fund. This not only incurs extra costs but also portrays the indecisiveness in fund management.  Keep track of portfolio churn by carefully looking at the change in the portfolio over a course of at least 3 years. For example, if a value fund changes its portfolio 100% every year, it is not serving its purpose.

This checklist is merely a start to your investing journey. In order to create long-term wealth, investors must learn to embrace volatility and stay invested through the ups and downs of the market. 

You shouldn't be concerned with whether you outperform or underperform the index. Your goal is to build a corpus that takes care of your goals, not to beat the index. A corpus is built over a period of time by taking the help of the power of compounding. 

Morgan Housel has summed it up perfectly:

“The math of compounding means the biggest wins don’t necessarily go to those with the highest returns; they go to those who earn pretty good returns maintained for the longest period of time.

Want to build yourself an investment corpus? Feel free to get in touch with us.

Need help with your finances?

 Feel free to get in touch with us. We will help you create a free financial plan that fit your financial goals. It's completely free.

Published At: Mar 22, 2022 09:13 pm
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