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Business News/ Money / Personal Finance/  How do you decide on the right mutual fund investment?

How do you decide on the right mutual fund investment?

You just do not jump into mutual fund investments; you must rather take time to decide which category of mutual funds to choose from and then percolate your choice to which particular mutual fund you must continue with to ensure a successful investment journey.

HDFC Mutual Fund launches business cycle fund. (Photo: iStock) (MINT_PRINT)Premium
HDFC Mutual Fund launches business cycle fund. (Photo: iStock) (MINT_PRINT)

Mutual fund houses are queuing up with innovative and new fund offer (NFO) schemes regularly. To date, there are 15,14,21,270 mutual fund schemes with around Rs 46,27,687.23 crores worth of funds under management. The lure of market returns has caused more investors to opt for equity fund schemes compared to the debt schemes that assure stability, albeit at much lower returns.


Assets under Management

Total Folios

SIP Folios

SIP monthly contribution

March 31, 2020

Rs 22,26,202.88 crores


3.11 crores

Rs 8,641 crores

March 31, 2023

Rs 40,04,637.60 crores


6.36 crores

Rs 14,276 crores

July 31, 2023

Rs 46,27,687.23 crores


6.80 crores  

Rs 15,245 crores

Source: AMFI

Amidst all the chaos surrounding the selection of mutual funds for investment, investors are keen to learn how to choose the right funds to achieve their financial goals. A successful investment journey is never without its faults, which is why many investors look up to advice from experienced advisors. Investors preferring the Do-It-Yourself (DIY) approach usually look for past performance results hoping that the future would mirror the past and that high returns from those funds would continue uninhibited.

While considering returns is pivotal when selecting a mutual fund, there exist several other crucial factors that demand attention. These factors encompass:

Investment objective: What precisely are your investment aspirations? Is it retirement planning, funding a child's education, or securing a home down payment? Your choice of mutual fund should harmonize with your investment objectives.

Risk tolerance: To what extent are you comfortable with risk? Mutual funds are categorized as low-risk, moderate-risk, or high-risk. Opt for a fund that aligns with your risk tolerance.

Fund management team: The fund's decision-making lies in the hands of its manager. Conduct thorough research and select a fund managed by a team with a commendable track record.

Fund expenses: Mutual funds levy fees for managing your investment. These charges can erode your returns, underscoring the importance of opting for funds with minimal fees.

Liquidity: How readily can you liquidate your fund shares? Liquidity varies among funds. If quick access to your funds is a priority, opt for a highly liquid fund.

Tax implications: The taxation of mutual funds hinges on factors like fund type and duration of shareholding. Adequately comprehend the tax ramifications before making an investment.

Considering all these facets is imperative when deciding on a suitable mutual fund.

However, the aforementioned are common traits or features that investors may look at before deciding their next choice of mutual fund investments. However, there are other factors at play too, which investors most often tend to ignore while choosing which mutual fund(s) to put their money in. These include

Consistency is thy name

Remember Oscar Wilde’s famous saying, “Consistency is the hallmark of the unimaginative."? Our natural self is not consistent most of the time, which is why we must appreciate something that continues to be unbelievably consistent. Instead of looking at the past five to 10-year data on returns, many investors tend to be impressed by the relatively sudden and temporary spurts in yields in some of these funds.

Investment managers, being human, are equally prone to the biases inherent in human nature. One such bias involves a penchant for fixating on recent outcomes. When a specific trend exhibits strong short-term performance, the allure to allocate a greater proportion of their portfolios to that trend can be enticing for investment managers.

Nonetheless, fixating on short-term trends carries inherent risks. To begin with, these trends can be transitory in nature. The recent success of a particular theme doesn't guarantee its perpetuation into the future. Furthermore, short-term trends often attract a multitude of investors, leading to price inflation and complicating return generation. Another aspect to consider is the durability of short-term trends compared to their longer-term counterparts. Long-term trends stem from fundamental factors such as shifts in demographics or technological progress. In contrast, short-term trends can be fuelled by fleeting elements like investor sentiment or political occurrences.

Given these factors, it becomes paramount for investment managers to shift their attention toward long-term trends when making investment choices. These extended trends are more likely to endure, less prone to overcrowding, and better poised to yield returns that genuinely serve the investors' best interests.

Assessing the stability of returns involves comparing them with the benchmark across various timeframes. While a fund might exhibit steady returns over a short span of one or two years, its performance might falter over more extended periods like five or ten years. It's essential to evaluate how a fund fares against a benchmark over a sufficiently lengthy investment duration.

When it comes to identifying funds capable of providing dependable returns, those equipped with robust processes and effective risk management are better positioned to deliver consistent performance.

A strong investment process in place

Investors frequently find themselves drawn to schemes overseen by renowned fund managers. However, it's vital to recognize that previous accomplishments don't ensure future outcomes. Even if a fund manager has demonstrated strong performance previously, there's no guarantee that this success will persist in the future. Various elements can impact a fund's performance, encompassing market conditions, the proficiency of the fund manager, and the fund's underlying investment approach.

Prior to investing in a mutual fund, conducting thorough research is of paramount importance. This entails evaluating aspects like the fund's investment objectives, risk assessment, associated fees, and historical performance. Equally important is an assessment of the fund manager's experience and track record.

Fund management encompasses both artistic and scientific dimensions. The artistic facet pertains to individuals, namely the fund manager, while the scientific aspect centres around the methodologies applied. While both individuals and methodologies hold significance, it's imperative for individuals to function within the structured framework to mitigate human biases and errors. The primary goal of a fund manager is to surpass market benchmark returns and generate alpha for investors. This achievement is realized through fund allocation guided by the overarching framework established by the fund management entity. Funds underpinned by robust methodologies are more resistant to experiencing significant fluctuations in returns.

Your investment goal matters

Does your mutual fund yield enough to help you reach your investment goals faster? Does it accept investments in a lump sum or through systematic investment plans (SIPs)? Adopting goal-oriented investing stands out as an effective approach to maintain investment discipline. When your investments are aligned with distinct objectives, you're more inclined to maintain your focus on the long-term perspective and are less likely to succumb to the temptation of selling during periods of market volatility. This explains why you must choose your mutual fund investments keeping your financial goals in mind.

If your aim is to reach a higher corpus for the future like setting aside enough for children’s education or a big house or accumulating a retirement corpus, choosing equity-based funds over debt funds helps.

Within mutual funds' growth options, the gains generated by the scheme are systematically reinvested within the same scheme. Across extended investment durations, these reinvested profits possess the potential to surpass your initial investment substantially. The compounding effect wields the power to fuel exponential growth in your investment over time. Therefore, it's crucial to determine your investment tenure thoughtfully, as the impact of compounding becomes evident primarily during an extended investment journey.

Ease of investing money

A smooth investment experience holds its own significance. Engaging in mutual fund investments should not be burdensome or anxiety-inducing. Here are several factors warranting consideration before finalizing a mutual fund choice:

Customer support: The fund house's customer service should be swift and supportive. Obtaining prompt and comprehensive responses to your inquiries should be feasible.

User-friendliness: Navigating through the fund house's website and mobile app should be intuitive. Accessing necessary information swiftly and conveniently is imperative.

Costs: The fund house's fees should remain reasonable. Prior to deciding, it's advisable to compare the fees across various fund houses.

Transparency: Clarity regarding the fund house's investment methodology is essential. You should be able to comprehend how your funds are being employed.

Historical performance: The fund house's track record plays a pivotal role. Evaluating the performance of the fund house's funds over a specified duration is prudent.

While the primary objective of mutual fund investments is to achieve capital appreciation or income returns, your investment experience holds significance as well. The process of making mutual fund investments should be devoid of stress and inconvenience. Therefore, before finalizing a fund choice, it's crucial to gather the following information about the fund house from friends or your mutual fund distributor.

For individuals new to mutual funds, it's essential to complete the Know Your Customer (KYC) process. Obtain information about the KYC procedure, whether it's conducted online or offline, from the fund house or the registrar and transfer agent (RTA).

  • Consider the efficiency of the onboarding process for customers at the fund house.
  • Evaluate the fund house's responsiveness to inquiries, complaints, and similar matters.
  • Assess the promptness of the customer service team at the fund house or RTA in handling various service requests, such as changes in bank details, address, phone number, or email address.
  • Find out if the fund house provides regular updates concerning your investments and the market.

Attending to these aspects aids investors in maintaining their focus on achieving their financial objectives.

The ESG factor

The surge in Environmental, Social, Governance (ESG) investing stems from a heightened awareness among investors regarding the influence of environmental, social, and governance factors on corporate effectiveness. ESG investing offers a pathway to support companies dedicated to sustainability and ethical business practices.

The rise in popularity of ESG investing can be attributed to several factors. Firstly, a mounting consciousness of the ecological and societal risks confronting companies has emerged. These risks can exert a substantial impact on a company's financial outcomes. Secondly, there's a growing demand from investors for heightened transparency concerning companies' ESG strategies. Thirdly, a plethora of ESG investment products and services have emerged, simplifying the process for investors to engage with ESG-conscious companies.

Furthermore, certain ESG funds have displayed commendable performance, offering an additional rationale for considering investment in them.

There can be myriad reasons for investing in mutual funds. However, you must be aware of why you wish to invest in a particular fund(s) and if it would be palpable to continue investing in them in the future.


We elaborate on the magic of compounding in mutual fund SIPs.
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We elaborate on the magic of compounding in mutual fund SIPs.

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Published: 02 Sep 2023, 11:50 AM IST
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