How to Pick Mutual Funds: The Step-by-Step Investment Strategy for 2026
Mutual funds are financial instruments that can help you achieve major financial goals, from capital gains to retirement planning. However, selecting the right mutual funds and the factors involved in that selection can sometimes be confusing for first-time investors. Thus, in this guide, we will cover all these nuances for you with a SEBI-compliant roadmap and help ease your mutual fund investment journey, from selecting the right fund to meeting your goals.
Table of Contents
Why Invest in Mutual Funds?
Investors prefer Mutual Funds instead of directly handling their own portfolios for numerous reasons. The advantages of investing in Mutual Funds instead of individual stocks are outlined below-
Diversification
It helps reduce the risk of market volatility. Pooled money in mutual funds is invested in a wide range of assets, including stocks, bonds and other securities. Then, even if one stock or bond performs poorly, the losses are balanced by other well-performing stocks and bonds. In this way, it becomes one of the most crucial reasons to choose mutual funds over individual investments.
Affordability
Most investment options require a lot of upfront capital, such as real estate, gold, or opening an FD. However, in mutual funds, you can begin investing with as little as INR 100 to INR 500.
Professional Expertise
A team of financial experts manages the money invested. They calculate market movements, analyses the risk involved, and continuously monitor the market with the objective of gaining maximum returns. This experienced financial expert team can be very difficult to afford as an individual; thus, it makes mutual funds an ideal choice.
For a detailed understanding and knowledge about each of these benefits, you can check our blog on the basics of mutual funds.
How to Pick a Mutual Fund?
Whether you are a new or seasoned investor, the following are the key points that you must consider before selecting a mutual fund to invest:
Understanding Your Goals
The first step you need to take is to determine your investment goals, which may vary from person to person. Also, it should be done with the time length in mind, such as how long you plan to invest and your return expectations. It will help you stay committed without being caught up in market fluctuations.
There are basically two kinds of goals: short-term and long-term. Short-term goals include maintaining an emergency fund and saving for lifestyle purchases, etc. However, long-term goals are for more significant priorities, such as capital appreciation, retirement planning, higher education, or maybe buying property.
Depending on your goals, you can choose a mutual fund that meets them; for example, if someone wants capital appreciation, they can consider equity funds. In the same way, there are various funds designed with different financial objectives. You decide your objective, then pick the one that meets it.
Risk Assessment
It is always wise to analyse the risks involved before picking a mutual fund. Risk differs depending on the type of mutual fund you are picking.
You can understand this as follows: if someone wants to invest aggressively with the objective of capital appreciation, they can choose equity mutual funds, as they offer higher returns than other funds, but they also carry higher risk.
On the other hand, debt funds are more stable, and investors with capital preservation as a goal can find them suitable because they involve lower risk.
Thus, risk assessment is an important step in aligning the investments with your risk tolerance level and overall financial goals.
Know about Liquidity
It is another important factor to consider when picking mutual funds. As an investor, it's essential to understand when you need to convert your mutual fund investments into cash. For instance, if you need it very early, you must refrain from picking equity funds; instead, you can consider liquid funds. Another thing is that compounding always works best when money invested is left untouched for an extended period of time.
Charges Involved
Mutual funds come with a few essential charges mentioned below-
- Exit Load: It is a small fee charged when you, as an investor, withdraw your money before the fund's set time period. It serves the purpose of encouraging investors to stay invested for the recommended duration.
- Expense Ratio: It is the annual fee that a mutual fund charges to manage your money. As an investor, you need to understand that the higher the expense ratio, the more it reduces the returns. The lower the expense ratio, the more money stays with you. E.g. let's say your fund earns 10% returns and the expense ratio is 1%, then your actual return will be 9%.
So, it's better to target those mutual funds with a lower expense ratio because they help you keep more of your returns, instead of paying higher fees.
Monitor Fund’s Performance
Informed investment decisions demand proper checks on the fund’s historical performance. Even though this information does not mean that the fund will replicate similar performance in the future, it still gives a fair idea about its consistency.
While it is impossible to guarantee profits on mutual fund investments, following the above-mentioned points may steer you in the right direction. If you still have any confusion, it is always advised to consult a professional financial advisor before investing in mutual funds.
Frequently Asked Questions On How to Pick Mutual Funds
1. How to select the right mutual fund?
Selection of the right mutual fund scheme depends on several factors, including personal financial goals, investment objectives, risk tolerance, and investment horizons.
2. Which Mutual Fund is best to invest in now?
The best mutual fund is a subjective choice that depends on an individual’s personal financial goals and several other factors.
3. Which mutual fund is considered the best for beginners in India?
As mentioned before, there is no single best fund for everyone. However, beginners may prefer funds that ensure a proper balance between returns and risk.
Related Blogs
