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How to select the best mutual fund to get optimum returns?

Over the past few years, mutual funds have acquired great acceptance among investors. As per AMFI, the asset under management (AUM) of the mutual fund industry in India has increased to Rs 38.89 trillion as on 31st December 2022 from Rs 7.60 trillion as on 31st December 2012, which is an over 5-fold rise in a span of just 10 years.

However, an inadequate basic understanding about the best mutual funds in India, prudent offline and online mutual fund investment routes, and capital markets often make many amateur investors to take an incorrect investment decision. Read on to understand ways that you as a retail investor must follow to get optimum returns on mutual funds.

  • Align your investment with your life goals

Aligning your investment as per your crucial financial goals assists you to decide your monthly investments as per your investment time frame. Deciding an investment time frame for your life goals assists you in better estimating whether you should opt for debt, equity or hybrid linked funds. For example, while equity mutual funds are volatile over the short term, they can overcome inflation and fixed-income instruments by a vast margin over the long term. Thus, for a financial goal with a long-term horizon of 5 years and above, you must consider equity funds. Similarly, as fixed-income instruments have capital preservation and higher income certainty features than equity funds, short term debt funds would be a better choice to meet your short-term goals having an investment time frame of up to 3 years. For your mid-term financial goals spanning between 3 and 5 years, invest in hybrid funds, which is a mix of both equity and debt funds.

  • Review the fund’s objectives and strategies

To decide on the best mutual funds to invest in, you must ensure to review every scheme’s asset allocation strategy, fund management style and investment strategy. Reviewing the fund before investing in the same will help you to better understand whether the scheme is the right match as per your risk tolerance level and financial goals. You can find the scheme’s investment objective and goals in the fund’s SID (scheme information document), KIM (key investment memorandum), product leaflets, product presentation and other product literature.

  • Review the previous funds’ performance

You must ensure to strike a comparison of the previous performance of the mutual fund scheme with its peer funds and benchmark indices over periods like 1, 3, 5 and 7 years. While the previous fund’s performance does not assure similar performance in upcoming times, striking a comparison of the fund’s past performance allows you to understand how the scheme performed in the distinct market and economic conditions previously. Accordingly, you can make an informed decision.

  • Consider the scheme’s expense ratio

The expense ratio is the percentage of daily net assets utilised for mitigating a fund’s annual operating expenditures. Such expenses include commissions paid to distributors, management and advisory fees, transfer and registrar fees, legal and audit fees, selling and marketing expenditures, etc. A lower expense ratio infers a higher amount would remain invested in the scheme for future compounding and growth.  

  • Check out the reputation and experience of the fund house

While many give major importance to the fund managers for assessing the scheme’s future potential, the fund houses even play an important role in determining their performance in the future. Reputable fund houses tend to endow higher importance on forming a quality mutual fund management team and pragmatic organisational processes instead of thoroughly depending on the mutual fund managers. So, even if a reputable and experienced fund manager exits the fund house to avail better opportunities, a strong organisational base of the fund house can still endow constant outperformance of the fund in future.

Ending note

Your selection for a mutual fund must depend on your investment objectives, goals, time horizon and preferences. Irrespective of the market movement and sentiments, you must concentrate on the basics and select the mutual fund that can assist you to attain your goals with ease. Ensure to factor in the above-mentioned 5 important tips to select the best mutual funds to get optimum returns.


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