Choosing a mutual fund scheme involves more than just monitoring recent returns. The scheme also needs to fit the investor’s financial goal, horizon and tolerance for market fluctuations.
What is Mutual Fund Scheme?
A mutual fund scheme raises funds or pools money from multiple investors and deploys the funds as per a stated goal, also known as the scheme mandate. A fund is like a joint investment vehicle operated by qualified fund managers. Depending on its mandate, a scheme may invest in equities, bonds, government securities, money-market instruments or a blend of various assets. Investors receive units whose value is reflected through the scheme’s Net Asset Value (NAV), which is calculated once at the end of each trading day.
Types of Mutual Fund Schemes
Under SEBI’s framework, schemes are broadly classified into equity, debt, hybrid, life cycle and other schemes; the last group includes index funds, ETFs and fund of funds. Liquid funds fall within the debt category.
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Type |
What it broadly does |
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Equity schemes |
Invest predominantly in equity and equity-related instruments. |
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Debt schemes |
Invest predominantly in debt and debt-related instruments; this group includes liquid funds. |
|
Hybrid schemes |
Invest across more than one asset class, including equity and debt. |
|
Life cycle funds |
Follow a glide-path approach across permitted asset classes for goal-based investing. |
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Other schemes |
Include index funds, ETFs and fund of funds. |
The different types of mutual funds schemes available in India help investors narrow down options and choose a suitable scheme aligned with their objectives and risk appetite.
Why Is It Important to Choose the Right Mutual Fund?
Scheme selection needs to reflect the investor’s goal, time horizon and risk tolerance. SEBI’s Riskometer depicts scheme risk on a scale from Low to Very High, giving investors a standard reference for assessing risk.
How to Choose the Right Mutual Fund Scheme?
For investors researching how to choose mutual funds, the process can be broken into these steps:
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Identify the financial goal: Define why the money is being invested and when it may be needed.
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Decide the investment horizon: Separate near-term goals from goals that allow a longer holding period.
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Assess risk tolerance: Compare your ability to handle fluctuations with the scheme’s Riskometer.
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Select an asset class and category: Match asset classes (equity, debt, hybrid etc.) and investment strategy (active or passive exposure) with the goal, horizon, risk appetite and preference.
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Review cost: Total Expense Ratio, or TER, covers expenses incurred in operating and managing a scheme.
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Evaluate returns with risk: Compare the scheme with its benchmark and review consistency across different market conditions.
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Choose the investment mode: SIPs allow a fixed amount to be invested at regular intervals. An SIP calculator or mutual fund return calculator can illustrate possible outcomes using assumptions, but actual mutual fund returns can differ.
For anyone researching how to choose mutual funds for beginners, goals and risk tolerance can help narrow the choices.
What Should You Evaluate Before Choosing a Mutual Fund?
Choose the Right Type of Mutual Fund
Start with the asset class. Equity categories include large cap, mid cap, small cap and flexi cap; debt includes categories such as liquid funds; hybrid funds combine asset classes. Decide whether you prefer an actively managed fund or a passive scheme like an index fund or exchange-traded fund (ETF).
Fund Performance
Review equity mutual fund performance through rolling returns, benchmark-relative performance and consistency across market cycles. Rolling returns examine multiple overlapping periods instead of only one start and end date, giving a broader view of consistency.
Past mutual fund returns do not guarantee future outcomes.
Fund Managers
For actively managed schemes, consider the fund manager’s experience, investment philosophy and consistency of process. Scheme factsheets disclose the fund manager, experience, AUM, portfolio and performance.
Evaluate Portfolio Quality and Risk
Review diversification, sector allocation, portfolio overlap and concentration. Standard deviation reflects return variability, beta indicates sensitivity relative to a benchmark, Sharpe ratio relates return to risk taken, and alpha indicates benchmark-relative performance after adjusting for risk. Portfolio turnover reflects trading activity in the portfolio. For debt schemes, one may evaluate portfolio maturity, duration, yield and credit quality. Passive schemes can be assessed using tracking error and tracking difference.
Other Factors to Evaluate
Also examine AUM, portfolio liquidity, diversification and expense ratio. AUM indicates assets managed, while TER represents recurring operating and management expenses. Passive funds and direct plans generally carrying lower expenses compared to actively managed funds and regular plans.
Conclusion
Before selecting a mutual fund scheme, review this checklist:
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Financial goal and investment horizon
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Riskometer and fund category
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Expense ratio and investment strategy
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Rolling returns and benchmark-relative performance
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Fund manager, diversification, concentration, AUM and liquidity
A goal-led process keeps the focus on suitability rather than recent return rankings. Calculators can support estimates, but a mutual fund investment decision still depends on risk, horizon and portfolio role.
FAQs
Which mutual fund is best for beginners?
There is no single mutual fund category that fits every new investor. Selection depends on the investor’s goal, horizon, risk tolerance and product understanding. Investors uncertain about scheme selection can seek professional guidance.
What is a good expense ratio for a mutual fund?
There is no universal expense-ratio figure across all categories. Compare TER among schemes within the same category and plan type, while also reviewing strategy, risk and consistency. Actively managed funds typically have higher expense ratios compared to passive funds. Direct plans generally carrying lower expenses compared to regular plans because distribution commissions are absent.
How does my investment horizon affect mutual fund selection?
The investment horizon indicates how long the money can stay invested and helps determine the asset class and risk profile that may suit a goal. Scheme selection needs to connect the goal timeline with the investor’s tolerance for fluctuations.
Disclaimer: The information on this document is provided for information purposes only. Investors are advised to consult a financial advisor before making investment decisions. Past performance may or may not be sustained in future.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.