Beginner’s Guide to Choosing the Right Mutual Fund

Choosing the right mutual fund can be a daunting task, especially for beginners who are new to the world of investing. With so many mutual funds available, it can be challenging to know which one to choose to match your investment objectives and risk tolerance. However, selecting the right mutual fund is crucial for achieving your financial goals and securing your financial future.

In this beginner’s guide to choosing the right mutual fund, we will provide you with essential information and tips to help you make an informed investment decision. As a beginner, you can also enroll in an online mutual fund course offered by and gain knowledge about the fundamentals of mutual funds to begin investing in the same.

How Do Mutual Funds Work?

A mutual fund is an investment scheme where an asset management company (AMC) pools money from a group of investors who share similar investment goals. The AMC appoints a professional fund manager to invest in various securities on behalf of the investors. It aims to generate maximum returns in line with the fund’s investment objectives.

Fund managers possess extensive knowledge of the markets and have a proven track record of managing investments successfully. Mutual funds charge an annual management fee known as an expense ratio, which covers the fund’s operational costs.

As an investor, you can receive regular dividends and interest income, along with capital appreciation. You can choose to reinvest your capital gains through a growth option or receive regular payouts through a dividend option. Based on your preferences you can choose from a debt fund, equity or hybrid fund to invest and grow.Β 

By investing in mutual funds, you can benefit from diversification, professional management, and liquidity. However, selecting the right mutual fund that aligns with your investment objectives and risk tolerance is crucial.

So, why wait? let’s get straight to that!

Choosing Mutual Funds: What Should You Look For?

Here are the top factors you should keep in mind when selecting a mutual fund scheme.Β 

1. Investing Objectives and Investment Horizon

When selecting the right mutual fund, it’s essential to identify your financial goals and investment objectives. Your financial goals can be short-term or long-term, and they can vary based on your current financial situation, age, income, and risk tolerance.

Also, the investment horizon or the length of time you plan to stay invested is also crucial to be considered. For instance, if you’re looking to save for a short-term goal, such as buying a car or taking a vacation, you may want to consider investing in a debt mutual fund that offers relatively low risk and stable returns. 

On the other hand, if you’re planning for long-term goals like retirement or buying a home, you may consider investing in equity mutual funds that offer higher returns but come with higher risks.

2. Risk Profile

When selecting the right mutual fund, your risk tolerance is a crucial factor to consider. If you prefer lower risk investments, conservative mutual funds that focus on capital preservation and generating regular income may be suitable for you. 

On the other hand, if you have a high-risk tolerance and want to aim for long-term capital appreciation, growth-oriented mutual funds may be a better fit. It’s essential to understand your risk appetite before investing in mutual funds. It is done to ensure that your investment aligns with your financial goals and expectations.

3. Track Record of Fund House and Fund Manager

When selecting a mutual fund, it is important to monitor the track records of fund managers and fund houses. A fund manager’s performance over a long period of time is a good indicator of their skill in managing funds. By reviewing a fund manager’s track record, you can evaluate their ability to select the right stocks and securities for their portfolio.

Similarly, the track record of the fund house should also be taken into consideration. The reputation of a fund house is determined by its past performance and its ability to consistently deliver good returns to its investors. It is important to look for a fund house that has a proven track record of generating high returns over the long term. 

Your investment app would likely have all the details on the funds to help you make an informed decision. You can also review the fund house’s investment philosophy and process to determine if it aligns with your investment objectives. It is important to choose a fund house that has a clear and transparent investment process. This can help you make informed investment decisions.

4. Expense Ratio

The expense ratio is an important factor to consider when selecting the right mutual fund. It is the annual fee charged by the fund house to manage your investments. This fee is deducted from your investment and affects your returns. Therefore, it’s important to choose a mutual fund with a low expense ratio.

One way to reduce the expense ratio is by a free demat account opening with a reputable brokerage firm. With a demat account, you can invest in mutual funds directly and avoid the commissions charged by agents. This can result in significant cost savings and higher returns over the long term.

However, it’s important to note that a low expense ratio should not be the sole criterion for selecting a mutual fund. A thorough research and analysis is a must.

5. Liquidity of Fund

When selecting a mutual fund, liquidity is an essential factor to consider. Liquidity refers to the ease with which you can buy or sell your mutual fund units. It is critical to choose a mutual fund that is highly liquid. It ensures that you can buy or sell units whenever you want, without having to worry about the availability of buyers or sellers.

Open-ended mutual funds are highly liquid, as they can be bought or sold at any time at their net asset value (NAV). On the other hand, close-ended mutual funds have a fixed maturity period, and investors can only buy or sell units during specific intervals.

Investors should also consider the size of the mutual fund while assessing its liquidity. A larger mutual fund typically has better liquidity than a smaller one. Additionally, mutual funds with a higher trading volume have more liquidity than those with lower trading volumes.

Choosing a highly liquid mutual fund ensures that investors can easily access their investments and exit them when needed, providing flexibility and ease of management.

6. Taxation

When selecting a mutual fund, taxation is a crucial factor to consider. It is essential to be aware of the tax implications before investing. For instance, in equity funds, short-term capital gains (held for less than 12 months) are taxed at a rate of 15%, while long-term capital gains (held for more than 12 months) are tax-free up to Rs. 1 lakh and taxable at 10% thereafter.

Conversely, for debt funds, the Financial Bill 2023 has changed the taxation with funds having less than 35% equity investment to be taxed short-term capital gains regardless of the holding period. This makes understanding the tax implications an important factor in determining which type of mutual fund is suitable for your financial goals.


To make an informed decision while choosing mutual funds, it’s crucial to evaluate the discussed factors. It’s recommended to consider your investment horizon, risk tolerance, taxation, expense ratio, and liquidity before investing in mutual funds. If you are finding it challenging to comprehend the investment characteristics of mutual funds, you can take up an online mutual fund course by

Radhika Sahani

Decoding stock market, trading & investing for all.

IRFC (Indian Railway Finance Corporation Ltd.) – Buy or sell?

Suzlon Energy Ltd. – Hidden Undervalued Stock in the Green Sector

How to Pick the Best Mutual Fund