SIP & Mutual Fund

How to find the Best Mutual Fund?

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Investment in Mutual Fund is not rare these days and everyone want to invest in Best Mutual Fund. After a lot of programs and advertisements run by the government and other financial institutions, the inflow in mutual fund increased many folds.  Now more people are aware of the benefit of investing in the mutual fund.

Related: Advantage of investing in Mutual Fund

There are many schemes of mutual fund available to investors and selecting the best fund scheme is one of the biggest challenges to every investor especially the beginners. This force investors to ask from their friends, colleague or relative. Some investors try to find the answer from search engines. 

There are many mutual funds available and every fund has its merit and demerit.  For one-person Fund A is best suitable fund then that fund doesn’t need to be also suitable for you.  The fund which is suitable for your financial goal, meet your risk-appetite is the best fund for you.

Every investor has a different financial goal, investment horizon and has a different reason to invest in a mutual fund. For one person the investment horizon is 15 years while for others it can be just 5 years. Even if the time horizon is the same, their financial position, the risk-taking ability may be different. Just remember that no single mutual fund scheme is suitable for everyone.

Instead of searching the best mutual fund schemes, you should look at those schemes which are best suitable for you.

Now, the question arises that how can we know which mutual fund is best suitable for us?

Which Mutual Fund is best suitable for you?

Selecting a mutual fund is not tough if you ask these three simple questions from yourself.

What is your investment goal?

Suppose if you are sitting in a railway station and don’t know where you want to go then how can you know which train you have to board. Just like that, you have to know your investment goal before starting your investment in a mutual fund. This can be buying a home/car, child higher education, retirement, child’s marriage, vacation tour etc. There are many schemes available but all schemes are not suitable for every type of financial goal.  

What is your investment horizon?

Time plays a very important role in investment. If you give maximum time to your investment then the chance to get high return will increase. You will get the benefit of the power of compounding only if you invest for long-term. So, deciding your investment horizon before starting your investment is very important.

Your investment horizon can be of 1 month or 5 years or 15 years. The scheme which works better for 15 years’ time horizon is not suitable for 5 years and 1-month investment period. This is because some fund is best suitable for the short term and some fund is suitable for a longer duration. If your investment horizon is more than 5 years then the equity fund is best suitable for you.

Related: 6 Reason to start investing early.

What is your risk appetite?

Every person has different risk-taking ability. Some people are aggressive investors, some are moderate investors and some are conservative investors.

Aggressive Investors are those investors who are willing to take the risk to earn a higher return. These types of investors invest in those schemes which are volatile, risky and able to give an amazing return.

Moderate Investors are those investors who want to reduce risk and enhance their return. They are willing to take a moderate risk in exchange for getting return higher than the inflation rate.

Conservative Investors are those investors who seek stability when it comes to investing. They are more concerned with protecting their capital than increasing its real value.

How to select Best Mutual Funds?

Mutual fund rating

Mutual Fund rating is one of the most important criteria for deciding which scheme is best among all the options.  Many research companies, magazines, news channels and newspapers give their rating to various mutual fund schemes. This rating is given based on the performance, return, volatility and other parameters.

However, ratings of these mutual fund change every fortnight or every month. A scheme may get a 5-Star rating in one month and 3- or 2-Star rating in next month. Even the same scheme gets different rating by different research companies for the same month.

According to a research company, investors should avoid those funds which got 1-Star & 2- Star ratings (the lowest ratings). Out of the total schemes, approx. 37.5% of schemes get the lowest rating and this means that you have to choose from the remaining 62.5% of schemes.

Many investors invest in mutual fund schemes based on rating. No doubt research rating is one of the important factors to consider before investing in any scheme but it should not be only the sole criteria of investment.  You have to consider other factors also like fund performance, return from the fund etc.

Consistency of Performance

Many investors compare the last 1- or 3-years of past performance and invest in that fund which offered the highest return in these periods. This is one of the worst ways of selecting mutual funds.

There are many funds which offered great return in last 1 or 3 year but if you check their return of last 5 years then you will find that they had poorly performed. Some funds offered 18% return in last one year but had given a 4% annual return over the last 5 year.

Long term comparison is the best way to find how the fund had performed in different market situations. But if you think that the fund which had performed better in the last 5 year will give good return in future then you are wrong. Past performance is not an indicator of how the fund will perform in future. Past performance is checked only to ensure how the fund performed in different market situations.

Expense Ratio

If you are investing in the mutual fund then ignoring expense ratio will result in a major loss in your return. Many investors ignore the expense ratio which results in a lower return on their investment.

An expense ratio of a fund means the fees charged by the AMC for administration, management, promotion and distribution of the fund. All the expenses incurred in the running of the fund are included in this figure. High expense ratio affects the investor’s return. As per the industry standards, an expense ratio of 1.5% is considered a good deal. Though expense ratio is capped by SEBI it is always advisable to invest in those funds whose expense ratio is low.

Exit Load

Uncertainty can happen with anyone and at that time he may need to withdraw his fund no matter for what purpose he had invested.

At that time if you are charged with high exit load because you are withdrawing before the maturity period then it is sure that your belief from the fund will vanish.

Let us understand what is exit load and how can you minimize or terminate it completely?

Exit load is a cost which is charged by the investors if they withdraw their money (sell the units of mutual funds) before the predefined period. Typically, mutual fund charges an exit load of 1% if an investor sells his mutual funds units within one year of buying. This cost is charged to discard the investors from early withdrawing.

Let us understand with an example. Suppose you invested in any mutual fund whose exit load is 1% if you sell your units within 1 year of investment. If you redeemed within 10 months then exist load come into the scene. If the NAV of the fund is Rs 100 during the period of redemption, the existing fees charged would be 1% of Rs 100 which is equal to Rs 1. After deducting the existing load, investor will get Rs 99. However, if the investors complete 1 year or say determined tenure then he doesn’t need to pay any exit load at the time of redemption.

Lowest NAV

In stock-market, many investors prefer to invest in penny stocks, so that they can get more units with the same amount rather than investing in the share of those companies which has sound fundamentals and has a high price for their share.

Related: – Why people lose money in stock market?

Many investors apply the same principle in the mutual fund also. They think that by investing in the schemes which have lower NAV will result in more units and more gain. As per them, higher NAV schemes are expensive, so they cannot afford to invest in those schemes with a small investment.

Taking an investment decision based on NAV is not the right way to invest in mutual funds. Its depend on percentage return. If the percentage return is 10% it’s mean that the scheme whose NAV is 10 will grow by Rs 0.10 and the scheme whose NAV is Rs 100 will grow by Rs 10.

If the NAV is low, you will get more units and if NAV is high then you will get a lesser number of units. Overall, your return will be the same i.e. 10% on your investment.

Let us understand with an example:

Suppose you invested Rs 1000 in a fund whose NAV is Rs 10, you will get 100 units. If the growth of the fund is 10% then the NAV of the fund will be Rs 11 and your investment value will be Rs 1100.

Your friend invested Rs 1000 in a fund whose NAV is Rs 100, he will get 10 units. Suppose his fund also grow by 10% then the NAV of the fund will be Rs 110 and his investment value will be Rs 1100.

By comparing both the situation you can understand that NAV should not be the deciding factor while investing in a mutual fund. The investor should check the return on their investment.

Sector-specific schemes

The mutual fund scheme which invests in a particular sector or industry is said to be sector-specific funds. Infrastructure fund, Manufacturing fund, MNC fund, banking fund are examples of sector-specific funds. 

Many investors who believe that a sector supposes banking will grow in future but are afraid of investing directly in equity or fail to understand which banking share to purchase, invest in banking fund.

The sector-specific fund could offer great return in the short run if you made your investment decision wisely and no uncertainty happens to that sector. But in the long run, investing in this type of fund is very dangerous. Many investors lost money in sector-specific funds.

During 2014, investors believed that banking sectors especially public sector banks will grow as the Indian Government is serious in improving the health of the banking sector in India. The government made several policies in favour of banking sectors which result in rapid growth in banking sectors funds. Within short term investors who invested in banking sectors funds earned a lot of money. After a few years when the Indian Government realized that it is impossible to revive every bank than they started a policy in which banks will get funds inflow from the government based on their performance. This means the bank which is performing poorly will hardly get any benefit.

After this decision, the share price of many banks fall and finally, the government decided to merge these banks with other banks. The investors who were enjoying great return from banking sectors suffered heavy losses.

So, one should not consider this type of funds rather you must choose those schemes which invest in different sectors. Even if any sectors performed poorly the return from other high performing sector will set-off the losses.

Even if you still want to invest in the sector-specific funds my recommendation is to invest only less than 10% of your investment in these types of schemes.

Related: 6 money mistakes destroying our financial life.

Advice from relatives, friends or colleagues

Instead of taking advice from a financial advisor, most of the investor take advice from their relatives, friends or colleagues. Taking advice before making any investment is good but you should take advice from them who is expert in this field.

Your relatives, friends or colleagues may offer you investment advice with good intention but you have to do your research before making any investment.

Related: Ignore Investment advice from relatives and friends.

Different fund categories?

If you want to invest for less 1 Year- Liquid Fund

If you want to invest your surplus fund for less than 1 year than you can’t bear any risk. This type of money is kept aside for meeting upcoming expenses and investor want to earn some extra return as compare to his saving account on his idle money.

For this type of investment, the liquid fund is the best option. This type of funds is low risk and will conserve your capital with some growth.

If you want to invest for 1-3 years- Low Duration Debt Fund

If you have surplus fund and you don’t need in near term i.e. within 1-3 years then you can invest in low duration debt funds. Debt funds are better alternative of bank fixed deposit and are more flexible. If you want a better return than the fixed deposit and comfortable with some risk then this fund is best suitable for you.

If you want to invest for 3-5 years – Hybrid Equity Fund

Investors who have a medium-term goal like buying a car/house within 3- 5 years then they can invest in Hybrid Equity Fund.

Hybrid Equity Fund is a mixture of equity and debt. Investors who are willing to get the exposure of equity market without taking much risk can invest in these funds. The presence of equity components in the portfolio offers the potential to earn a higher return and the debt component saves from any extreme volatility in the market.

If you want to invest for 5+ years- Multi-cap fund

If you are willing to invest for more than 5 years than equity mutual fund is the best suitable fund for you. Equity fund invests mainly in stocks of various companies and can generate a high return over the long term. This type of investment is highly risky and is suitable for only those investors who are willing to take risks and can invest for a longer duration.


Investment in mutual fund is gaining popularity but many investors choose wrong funds because of various reasons. It is always recommendable to look at your financial position, risk-taking ability and investment time horizon before making any investment. Never think that if a fund is suitable for your relative or friends then it is also suitable for you.

If you are under 40 and your investment horizon is more than 10 years then you can take some risk and invest in equity-oriented fund.

If you crossed the age of 40 years and your investment horizon is not more than 10 years then my recommendation is not to take too much risk. It is better to invest in hybrid-equity funds where you can get a better return with low risk.

At last, I want to say that never follow blindly to anyone. It’s your money and no one can understand your situation much better than you. There is no problem in taking tips and advice but do your research, check your goals, risk-taking ability and your investment time horizon. You can consult with an experienced advisor who can guide you much better than your friends or relatives.


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