Mutual funds are among the top choices for investors seeking to grow their wealth. Choosing the right mutual fund depends on several factors, including your risk appetite, expected returns, investment period, expense ratio, past performance, and experience of the fund manager.
In this blog, we will guide you on How to Choose Mutual Funds that may deliver better returns. We will also cover tools and resources to help you select the best mutual funds, discuss their pros and cons, and highlight the best-performing ones.
Table of Contents
What are Mutual Funds?
Mutual funds are pooled investments from several investors, who invest their money together in one fund. These funds are managed by professional fund managers who decide where to put the money, in stocks, bonds, or other assets. Investors receive units representing their share of the fund, proportional to their investment.
It is a simple way to invest without having to pick a stock or a bond yourself. The primary benefits of mutual funds include diversification of risk, liquidity, and regulatory protection. In India, SEBI regulates mutual funds to protect investors and ensure transparency.
How Mutual Funds Work
Mutual funds pool money from multiple investors to buy a diversified portfolio of assets. When you invest, you receive units representing part ownership of the fund’s underlying assets. The value of each unit is called the Net Asset Value (NAV), calculated as:
NAV = (Total Assets − Liabilities) ÷ Units Outstanding
A mutual fund’s performance depends on the value of its assets. If asset prices rise, the NAV increases; if they fall, the NAV drops. Investors can invest through banks, asset management companies, or online platforms, with minimum amounts varying by fund type.
Fund managers decide how to allocate funds based on the scheme’s strategy, selecting sectors, industries, and securities. Active funds require constant management, while passive or index funds track a benchmark index like Nifty or Sensex. Mutual funds aim to diversify risk, but all investments are subject to market fluctuations.
Types of Mutual Funds
Mutual funds come in different types, each designed to meet specific investment goals, risk levels, and time horizons.
This below present table covers the main types of mutual funds, so you can quickly see what each offers.
| Mutual Funds |
Risk Level |
Overview |
| Equity Funds |
High |
These funds primarily invest in company shares. They aim for capital appreciation and can be categorized by company size (large-cap, mid-cap, small-cap) or investment style (growth, value, blend). |
| Debt Funds |
Low to Moderate |
These funds invest in fixed-income securities such as bonds, government securities, or corporate debt. They aim to provide regular income with lower risk than equity funds. |
| Hybrid Funds |
Moderate |
These funds mix both equity and debt investments to balance growth and stability. Allocation can vary depending on the fund’s objective, with balanced funds being the most common example. |
| Money Market Funds |
Low |
These funds invest in low-risk, short-term instruments such as Treasury bills, commercial paper, or certificates of deposit. They focus on capital preservation and liquidity rather than high returns. |
| Liquid Funds |
Low |
These funds invest in short-term debt instruments with maturities up to 91 days. They prioritize liquidity and low risk, making them ideal for quick access to funds. |
| Income Funds |
Low to Moderate |
These funds focus on generating regular income by investing in bonds, fixed-income securities, and dividend-yielding stocks. They suit investors seeking steady returns with moderate risk. |
| Sector Funds |
High |
These funds invest in specific industries or sectors such as technology, healthcare, or energy. They allow targeted exposure but carry a higher risk due to concentration in one area. |
| Index Funds |
Low to Moderate |
These funds track the performance of a market index such as the Nifty 50. They provide broad market exposure at low cost and are ideal for passive investors. |
| International / Foreign Funds |
High |
These funds invest in companies outside the investor’s home country. They offer diversification and potential for higher returns but involve currency and geopolitical risks. |
| Exchange Traded Funds (ETFs) |
Low to High |
These funds trade like stocks on exchanges, tracking indexes, sectors, commodities, or other assets. They offer liquidity, diversification, and low costs. |
Also Read: What are Exchange Traded Funds (ETFs)
How to Choose the Best Mutual Funds
Choosing the right mutual fund is about matching your investment with your financial goals, risk tolerance, and time horizon. The right choice can make a big difference to your returns and peace of mind.
Here are some basics to keep in mind while choosing mutual funds:
1. Define Your Financial Goals
Clarify your investment goals: retirement, buying a home, children’s education, or wealth creation. For short-term needs, debt-oriented funds like liquid or ultra-short duration funds work best. For long-term goals, equity funds offer higher growth potential but come with market volatility.
2. Know Your Risk Tolerance
Different funds carry different risks. Equity funds are volatile but offer higher returns over time. Debt funds are steadier with lower returns. Understand how much risk you are comfortable taking before choosing a fund.
3. Determine Your Investment Horizon
Your time frame influences fund choice. Short-term goals (under 3 years) suit safer, liquid funds. Long-term goals (5 years or more) allow you to explore equity funds that can weather market fluctuations and deliver higher returns.
4. Check Past Performance
Review returns over 3-5 years, not just the last year. Compare with benchmarks and peers to understand consistency. Past performance is not a guarantee but offers insight into how the fund handles different market conditions.
5. Review Expense Ratios
A high expense ratio reduces your net returns. Compare expense ratios of similar funds, as lower cost generally means better value.
6. Assess Fund Manager and Strategy
A skilled manager with a consistent investment strategy matters. Check the fund’s portfolio, asset allocation, and investment style to ensure it aligns with your goals.
7. Understand Tax Implications
Equity funds held over a year qualify for long-term capital gains benefits. Debt funds follow different tax rules. Knowing the tax impact helps you plan better.
8. Consider Entry and Exit Loads
Entry load is charged when investing, while exit load is charged when withdrawing before a set period. Check these costs to avoid surprises when redeeming your investment.
9. Choose Between Direct and Regular Plans
Direct plans are cheaper since they avoid broker commissions. Regular plans include intermediary costs but may offer advice. If comfortable doing your own research, direct plans are usually better.
10. Check Liquidity
Liquidity means how quickly you can convert your investment into cash. Open-ended funds are generally liquid, but some funds have lock-in periods or exit loads. Always check if you may need quick access to your money.
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Tools and Resources for Choosing Mutual Funds
Choosing the right mutual fund becomes easier when you use the right tools and resources. They help you compare funds, check performance, assess risk, and understand costs. Key resources include:
- Mutual Fund Comparison Platforms like Value Research Online, Morningstar, and Moneycontrol.
- Fund Fact Sheets for detailed information on performance, portfolio, and strategy.
- Annual Reports and Offer Documents for deeper insights into fund objectives and risks.
- SIP Calculators to estimate investment growth.
- Expense Ratio Tools to find funds with lower costs.
- Risk Assessment Tools for understanding volatility and consistency.
- Mobile Apps from AMCs and brokers for easy tracking and comparison.
- Financial Advisors and Communities for tailored advice and peer insights.
- Regulatory Resources, such as SEBI’s investor education materials.
- Financial News and Analysis Platforms for expert updates and fund analysis.
Best-Performing Mutual Funds in 2025
Let’s take a look at the Best-Performing Mutual Funds in India.
| Fund Name |
Category |
1-Year Return (%) |
3-Year Return (%) |
Expense Ratio (%) |
Risk Level |
| Aditya Birla Sun Life Large Cap Fund |
Equity (Large Cap) |
(-0.75) |
17.14 |
0.98 |
Very high |
| Aditya Birla Sun Life Nifty 50 Equal Weight Index Fund |
Equity (Large Cap) |
(-1.65) |
18.44 |
0.40 |
Very high |
| Bandhan Large Cap Fund |
Equity (Large Cap) |
(-0.47) |
18.47 |
0.87 |
Very high |
| Baroda BNP Paribas Large Cap Fund |
Equity (Large Cap) |
(-4.39) |
18.25 |
0.76 |
Very high |
| Canara Robeco Large Cap Fund |
Equity (Large Cap) |
0.81 |
17.72 |
0.47 |
Very high |
| DSP Large Cap Fund |
Equity (Large Cap) |
0.69 |
19.83 |
0.86 |
Very high |
| DSP Nifty 50 Equal Weight Index Fund |
Equity (Large Cap) |
(-1.59) |
18.52 |
0.40 |
Very high |
| Edelweiss Large Cap Fund |
Equity (Large Cap) |
(-1.81) |
18.34 |
0.61 |
Very high |
| Franklin India Large Cap Fund |
Equity (Large Cap) |
(-0.34) |
16.24 |
1.08 |
Very high |
| HDFC Large Cap Fund |
Equity (Large Cap) |
(-2.54) |
18.41 |
0.97 |
Very high |
Note: The list of funds mentioned above is based on data from Value Research Online.
Top 5 Benefits of Investing in Mutual Funds
Mutual funds offer a range of advantages that make them an attractive choice for investors at different stages of their financial journey. From managing risk to building wealth, here are the top benefits to consider.
1. Diversification
Mutual funds pool money from multiple investors and invest across companies, sectors, and asset classes. This spreads risk, so poor performance in one asset is offset by others. Even small investments give you exposure to a broad portfolio, reducing the impact of market volatility.
2. Compounding Benefits
Returns and dividends can be automatically reinvested, allowing your investment to grow significantly over time. Regular investments through SIPs, even in small amounts, can grow significantly over 10-20 years, helping you build wealth that grows faster than inflation.
3. Professional Management
Fund managers research, select, and manage investments to deliver consistent returns. This allows investors without the time, expertise, or resources to benefit from professional decision-making and disciplined portfolio management.
4. Low Costs and Accessibility
Many mutual funds allow you to start investing with as little as ₹100. This makes them accessible to a wide range of investors. Expense ratios include management fees and other operating costs, reducing your net returns.
5. Rupee Cost Averaging
Through systematic investment plans (SIPs), you invest a fixed amount regularly. This helps buy more units when prices are low and fewer when prices are high, smoothing out market volatility and lowering your average investment cost over time.
Risks of Investing in Mutual Funds
While mutual funds offer many advantages, they are not without risks. Understanding these risks can help you make informed investment decisions and manage potential downsides.
1. Market Risk
Mutual funds invest in equities, bonds, or other assets whose values fluctuate with the market. A market downturn can reduce the value of your investment.
2. Interest Rate Risk
Changes in interest rates affect debt funds. Rising interest rates usually lower bond prices, which can reduce returns for such funds.
3. Credit Risk
Debt funds investing in corporate bonds face the risk of default if issuers fail to pay interest or repay principal, impacting fund performance.
4. Liquidity Risk
Some funds may have lock-in periods or restrictions, making it harder to redeem your investment quickly without charges.
5. Management Risk
A fund’s returns depend on the fund manager’s decisions. Poor strategies or incorrect timing can result in lower-than-expected returns.
The Bottom Line
Learning how to choose mutual funds is about finding the right balance between your goals, risk tolerance, and time horizon. Start by defining what you want to achieve, then pick funds that align with your investment style. Use tools like a mutual fund return calculator to estimate potential growth and make informed choices. Once you understand how to choose mutual funds that fit your financial plan, you can invest with confidence and steadily build wealth over time.
FAQs About How to Choose Mutual Funds
Q1: Which mutual fund category is best for beginners?
For beginners, index funds, large-cap mutual funds, or debt funds are often the best starting point. They offer lower risk and more stable returns compared to mid-cap or small-cap funds, making them easier to manage for those new to investing.
Q2: How do I pick a mutual fund?
Picking the right mutual fund starts with understanding your investment goals and risk tolerance. Compare past performance, fees, fund objectives, and asset allocation to choose a fund that aligns with your financial plan.
Q3: Should I invest in mutual funds through SIP or a Lump Sum?
SIPs help build wealth gradually, averaging costs over time and promoting disciplined investing. On the other hand, lump sum investments work best when you have surplus funds and want to invest immediately, particularly in bullish markets. Each method has its pros and should match your financial situation and market outlook. Additionally, market conditions and personal cash flow also guide which is more preferable, SIP or a lump sum.
Q4: How often should I review my mutual fund investments?
Yu must review your mutual fund investments every three to six months. Short-term fluctuations are normal, but consistent underperformance should prompt rebalancing or switching to a more suitable fund.
Q5: Is it possible for me to incur losses with a mutual fund?
Yes, mutual funds can lose value, especially in volatile markets. Even top-performing funds may experience downturns. Understanding your risk tolerance and investment horizon is key to managing potential losses.