What to look while you choose a mutual fund :)

POSTED BY Jagoinvestor ON January 31, 2009 COMMENTS (51)

One of my readers was confused with the question “Which mutual fund should he invest in through SIP ? ”

He started an SIP of 1000 in Reliance Regular Saving mutual fund , suggested by an agent . How was his investment? It is a mistake or a good decision? This is a common problem with investors .

Let me today give you a simple way to think and a methodology to choose mutual funds for your investment depending upon your requirement . In this article we will only talk about investment in Equity Diversified mutual funds for long term (5+ years) .

choose mutual fund

For Beginners : Read what are mutual funds

Question : What does the return from mutual funds tells us? and how do you interpret it?

Ans : Understand that the returns of a mutual fund shows you how did it perform over than period, How did it manage his funds and took there investment decisions in good times and bad times. It means that you should see its performance in good times and bad times.

A simple analogy can be how do you want your wife/husband to be like, One who is really great in good times and excellent person to be with in Good Times, when everything in life goes great.

Or you want a person who is there with you in good and bad times, supports you in good and bad times. When times are good, everyone behaves good and performs well, There is a saying “Don’t judge people by there Sunday appearances”. Look at a bigger Picture.

Looks how a mutual fund performed in good times, in bad times, did it invest according to there plan, Is there management excellent. It does not matter if they were No 1 or No 2 this year or that year.

But if they were just good in every year, and perform well above there benchmark, and keep performing over time, Its bound to be become an excellent long term consistent performer.

Question : What about the last 3 yrs returns of a mutual funds?

Answer: It will give you a good indication, but not an overall picture. If you see 3 yrs return, you have to understand that out of those 3 yrs, 1st and 2nd years were strong bull markets, where any dog and cat has also performed very good if not excellent. and in last year they gave very bad returns.

So ultimately they will be in positive returns in 3 yrs. You should also look at there 5 yrs return and 3 yrs returns. Both in synergy with each other.

When you see Reliance Regular Savings Fund you can see that its 3 yrs returns are 7.82% which is very good compared to other funds (this fund is Rank 2/135 in the 3 yrs category ), but when you see its 1 yrs returns, you can see actual face, the returns are -51%, if you see the rank for 1 yr, its 127/210.

If you look at its portfolio allocation at https://www.valueresearchonline.com/funds/portfoliovr.asp?schemecode=2790

you can see that its allocation to mid cap and small cap companies is very high, It can give you good returns but also it has very high risk. Please understand that i am trying to say that this fund is good or Bad. No !! I am trying to tell you what to see, how to interpret.

What factors should you keep in mind before choosing a Mutual Fund?

People get excited by seeing returns of years 2003-2007, that was in range of 35-50%. Which is not possible in long term. Now from this point on (2009), the returns in long term will be in range of 12-15% (max 20%). Its difficult to see this kind of bull run in another medium term (5-7 yrs).

Now you should just expect normal 12-15% kind of returns in long term.

So, whom should you rely on, On mutual funds who launched them selves near 2001-2002 and gave great returns from there onwards because they them selves don’t know how they gave them.

Or shall you choose those mutual funds who have seen all types of markets in India and continuously gave much better than average returns from long term, They performed in good market, bad market, quiet market and roaring market.

So the things you should look at mutual funds are :

1. Long term performance, It should figure out in top 10-15 at least over 5 yrs returns.

2. They should have a track record of consistently outperforming its Bench mark (this shows that they did better than what they were based on and tracking ).

3. See that its management is good, Don’t just buy Any Idiot MF just because it returns 45% last year, but you have never heard of its parent name. Some long term Great AMC’s are DSP, SBI, Sundaram, HDFC, KOTAK, PRINCIPAL, HSBC, RELIANCE (In order of my liking), Make sure you dont follow this, it is just to give an idea. DSP is one of the best and old AMC in India, dont look only for Indian names.

4. Once you shortlist some mutual funds, then look for its portfolio allocation, see how it has put its money for large, Medium and small cap companies. If its concentration is high on Mid and small cap funds, it means that it has more than average risk, but potential for very great returns also, choose it if it fits your risk appetite.

For people who just want to take a short route and want to choose some mutual fund based fast, but with not great accuracy, you can just see the list of mutual funds appearing on 5 yrs returns list or since inception returns (Should be greater than 3-4 yrs at least) and choose any one of them.

This will make sure that you have not made a bad choice, if not great.

Some links :

To see the rankings of mutual funds and compare them on different parameters

1. Go to https://www.valueresearchonline.com/funds/default.asp

2. In the right side, you can see “Compare Fund”, choose “Open Ended” in the first box and for the second part choose “Equity Diversified” or “Tax Planning” or any other thing which you want to compare. and now click on Go.

3. You can now see a list with different parameters like Snapshot, Performance, Portfolio etc etc.

4. Click on Performance and then you can see different parameters like 1 month, 6 months, 1 yr, 3 yr, 5 yrs and ranks. You can sort them by clicking on 5 yrs or 5 yrs ranking to see the ranking. Example. When you click on 5 yrs returns on the top, you can see the ranking either in ascending or descending form (click once again to see in different order).

5. In the same way you can choose different parameter also.

This article gave you a general idea on how to choose a mutual fund and interpret different things. You can also do some advanced analysis the way I discussed in one of my previous article : https://www.jagoinvestor.com/2009/01/95-of-salaried-people-are-rushing-to.html

Question : Which Mutual funds I will invest in if given a choice?

Ans : I hate this part for suggesting some mutual funds, but i know people look for it and expect so let me give some.

Equity Funds :

1. Sundaram BNP Paribas Select Focus Reg
2. DSPBR Equity-D
3. Magnum Contra
4. Sundaram Taxsaver (For TAXSAVING) : see this for more
5. Nifty Beas (Index Fund, take SIP in this) : see this article for more

If this article helps you in anyways, please comment to tell if you liked it and learned anything important from this. I would be glad to hear from you. If it helped u anyways, this article would be considered as success.

I write this article on Saturday, 3:00 Pm after a chat with one of my readers. I am now getting ready for a Trek next morning. Looks like I have written for next 2-3 days of my quota, huff … Feeling tired now. (kidding).

Disclaimer : I think Reliance Regular Savings FIf this helps you in anyway und is a good fund. But there may be much better choices for long term. I hold no mutual funds other than some tax saving funds.

51 replies on this article “What to look while you choose a mutual fund :)”

  1. sunnyg78 says:

    Had invested in ELSS funds in 2008 after thorough analysis, but the returns are too bad till now. I would infer that its very difficult to pickup right funds for long term say > 10 years

    The funds:: These were equity diversified and top rated funds, then !!
    Birla Sun Life – Tax Relief
    SBI Magnum
    Principal Tax Saver

    Rather I would invest in reputed Cooperative banks FD of standard 10% interest rates – consistent and fixed returns.

    1. I think those funds are performed well especially SBI tax relief. What is the return you have got , what was the NAV for these funds when you bought them ?


  2. sukanya says:

    hello manish,

    I have an LIC pension policy kind of having 50k premium yearly, after 15 yrs term i’ll get a pension of 5k monthly.. should i continue this plan.. paying such huge premium is really paining, 5K at that time is not much worth at all.. could u please guide me..

    1. Obviously .. just not worth it .. get out of it, use future premiums in something better


  3. Sanjay Thorat says:

    Hi Manish,

    It is a great article. Thanks!
    Is the list of your favorite Mutual Funds still the same or has it changed? In other words, shall we review our list of favorite mutual funds every year or two and change it if required?


    1. I need to write an article on that πŸ™‚ , will do that !

  4. Yash Dubey says:

    Hi Manish,
    another superb article.. I am still in progress to decide which all funds I should invest in. This was just to let you know that it has been more thn a week and i m still glued to ur site..

    1. Yash

      Thanks πŸ™‚ . I am sure you will love all the articles .. read them one by one

  5. nandish says:

    sure harsha your point is noted.

  6. Harsha says:

    Hi Manish,

    Very good article, but I am curious to know if you would write this in a different way, if you re-did it today..? because of increase in your experience/changes in mkt condition/newer methods to compare MFs etc…


    1. Harsha

      Will rewrite it , But no delivery date promised πŸ™‚

      1. Harsha says:

        Will wait πŸ™‚

  7. iv says:

    thanks.it was a nice article

  8. Jayanth Kulkarni says:

    Thanks a lot dear. Hope many good articles later in a short period.

    1. Jayanth

      Thanks πŸ™‚ . You keep on reading and you will get more articles like these


  9. S Roy Choudhury says:

    Hello Manish
    Thanks for this excellent article. I have been planning to invest in SIP MF and I think I shall go for HDFC Top 200 (G). I intend to invest Rs.1000 pm and my goals are not long term. I intend to keep investing in the SIP MF for about 5 years at most. I’m about 37 years old and work in Govt sector (as of now retirement age is 60). I already have a PPF a/c, and I was wondering instead of investing in a MF would it be prudent to invest further in PPF. Could you please enlighten me on this?

    1. S Roy

      You are over-invested in Debt at the moment as you have no equity component , So it would be prudent to be in equity for some part atleast . HDFC Top 200 is a good fund and 5 yrs is medium term (not long term), so you can expect good returns like 15% but with a very small chances of getting small return if things go wrong .


  10. Pankaj Parmar says:

    Hi Manish

    Thnx for going as minute as possible to get to the filtered details of all the financial products available in the market at the moment

    This is my second comment / observation, after PPF ( variations in rate of expected returns )

    As MFs, I think the matrix and dynamics of the FM / CIO plays a pivotal role rather than anything else. Dynamic FM/CIO in respective category of funds i.e. debt, equity, liquid et al. are able to garner and generate comparatively more returns than the set bench mark market index performance. And this we often come across, if happen to compare fund returns with market index movements.
    So the purpose of approaching you again is that now it is high time that galaxy of START PERFORMERS FM/ CIOs got to be screened like say Sabharwal and the likes

    Hope you would appreciate my point in the context

    1. Pankaj

      I actually was not able to understand your comment and what you mentioned on the first reading , can you tell me what is FM/CIO here ?


      1. Pankaj Parmar says:

        in short it is dynamic of FM ( FUnd Manager) / Chief Investment Officer (CIO), whose perception of investment strategy depending on the kind of mutual fund schemes they run, hold a reasonably valid and impressive ground to go for

  11. Jojo Joson says:

    Well written manish bahi πŸ™‚

    1. Thanks Jojo πŸ™‚


  12. Rajiv Ahuja says:

    What is your take/views on Canara Rebaco and IDFC fund?What about Small & Midcap funds?

    1. give exact name of funds

  13. Jahnavi says:

    Could some one get me more info on other insurance product.

    1. nivedita says:

      Hi Jahnavi!
      What type of information you want on insurance products?

  14. Jahnavi says:

    Thanks for the more update…. One thing i would like to bring to your notice… this site looks like Anti LIC…. i got bad experience with other companies… but they never been mentioned … similar to the given case all above other companies also selling there product with wrong promise. Why those things are not described.

    1. Jahnavi

      It might look like that , but I have used many other Misselling stories like one on ICICI , ICICI RGF , in general ULIP misselling . As the biggest insurance seller is LIC , i would say the blog might give more updates on that πŸ™‚


      1. PRAMOD says:


        Please help me to build a MF portfolio as i am new this. I been doing R&D from last one month and unable to come to a decision. I would like to creat a corpus for my son and daughter and also for my retire. Now i am 30, may work till 55. I can keep 10k pm for mutual funds alone after making other investment. I have identified few Mf, hdfc top 200, relaince growth, SIMLE, paribas, DSpbr top 100, hdfc prudence, and also i will have to invest in index funds also.

        1. Pramod

          Your choice of funds are good , just make sure that your goals are long term so that your investments in these equity products does not become to risky . You can go with HDFC top 200 , DSPBR top 100 and UTI opportunities .


  15. Manish says:

    Good article …. But i dont agree with you on your liking of AMC and 3 funds which you had recomended . DSP is old AMC but its not a strong AMC dats what i believe

  16. sarang acharya says:

    Hi Manish,

    Really a simple artile to understand mutual funds please continue to give your ideas.
    You have changed my thinking,I have always searched for shot term perorming funds thininng of short term investments but now i understand very clearly short term performances does not help.

    Thanks or this information,
    Sarang Acharya
    System Administrator

    1. Sarang

      Yup .. You are correct . Short term hunting means you are more of speculating , which is also fine it goes with your style πŸ™‚


  17. rajivahuja says:

    gr8 article.

  18. Pingback: Personal Finance « Resources
  19. Daddy Paul says:

    I like to look at the manager of the fund and what he has done. Good managers tend to keep delivering.

    1. manish says:

      good point πŸ™‚


  20. manish says:


    Nice to have you at this blog . Mutual funds are of different kinds and each one has different risk/return spectrum . The lowest risk mutual funds are “Debt Funds” , these funds invest in things like Govt bonds , certificate of deposits , corportate bonds , FD , cash etc . So they invest in things which are themselves safe . Then comes “Debt oriented mutual funds” , then “Balanced Funds” …

    So a mutual funds will put some % in Debt products (safe) and rest in Equity (shares) , so more it puts in Equity , more it is riskier .. You should read : http://jagoinvestor.dev.diginnovators.site/2009/01/what-to-look-for-while-choosing-mutual.html to understand how to choose a good mutual funds .

    Search for “types of mutual funds” , “debt funds” , ” balanced funds” etc .. Goodluck .. keep coming πŸ™‚


  21. Shilpa Agarwal says:

    hi manish ur articleis really good. I m a BBA student and making a project on Mutual Fund. I want to know which are the funds that have comparitively lower risks. please help.

  22. SivaPatnani says:

    Good article for new to MFs

      1. Venkat says:

        Hi Manish,

        Greetings of the Day!!!. I have been visting your blog in the last few months and it is fantastic. Iam trying to go throuh such blogs ever since I wanted to gather info/knowledge on mutual funds and ULIPs before start investing them. I always try to make my own decisions (whether they are going turnout to be good or bad) and hence gather information and take a informed and concious decision. I have almost decided that ULIPs are not good for me and I can try MFs. Recently I came across one article that said ULIPs are better and cost-efficient than Mutual funds, if investment horizon is more than 10 years, due to higher % of fund management charges of mutual funds. Is that true?. Assuming my investment horizon is about 15 years do you have any suggestions?.

        Please note:
        a) My investment is neither for tax saving as all my quota got exhausted
        b) nor, for insurance needs. I have already taken a term insurance for 30L (60L if accidental) with Full disability and Partial disability rider.
        c) I am 35 years and my PF balance as on date is Rs.10L.
        d) I am thinkg that my retirement would be around 45 years (max 50 years) as I am working in IT. As you know, in IT we dont know when recession hits and when we will become obsolete in the industry πŸ™‚
        f) Goals are Childeren education and additional corpus for retirement
        g) already have an Independent house taken on loan 5 years back (with 8% fixed Interest rate).

        1. shittyvenkat says:

          u r a bragging peice of shit!

  23. Manish Chauhan says:


    Sailesh is actually trying to suggest that one should not invest in tax saving fund because of the lock in issues , He is still to reply on my comment . Lets see what does he say


  24. NKanani says:

    I am a novice in such matters (striving to understand how are my past investments – suggested by others – and how am I going to invest hence forward)…

    Is Shailesh talking of 'timing' the investment in mutual fund? this way, you can purchase lumpsum when markets are down, and then, relax till next three years… knowing that none of your investments were done at higher market value?

  25. Manish Chauhan says:


    OK great . Fair enough . But then please answer this

    If today is Oct 2009 , and I want to do investmnet I have two options .

    Option 1: Start SIP of 1 yr in Tax saving Mutual Fund . In this case only after 4 yrs , All my money will be fully unlocked (It will unlock from 3rd yr and then each installment will get unlocked each month) .

    Option 2: Start a RD for 1 yr and accumulate all the money , This will take 1 yr and then when i invest it in Tax saving Mutual fund , then again it will be locked for 3 years , So total of 4 yrs here also .

    But in the Option 1 , I was able to get some money from 1st month from 3rd yrs onwards .

    How is option 2 better than Option 1 then ? Please share your views on this .

    How do you justify that option 2 is better than option 1 and in which cases ?

    Is there any case or situation where you recommend Option 1 ever ?


  26. shailesh says:

    Hi Manish.
    You have raised very imp question.
    As I said I would always recommend lumpsum invt in Tax saving MFs.
    However, suppose, if one is not in a position to invt lumpsum amt, then he can open recurring deposit a/c in a Bank and then invt maturity proceeds in Tax saving MF.

    Of course, these are my personal views. But, if one is comfortable with and have enough confidence in AMC and does not require the funds in near term, then he can go for a SIP in tax saving fund. Lets say one wants to start a SIP for his child's education or marriage and would need funds down the line 10-15 yrs, then he can go for SIP in tax saving funds having good track record of more than 5 yrs.

    I hope this clarifies your doubt.


  27. Manish Chauhan says:


    Nice.. thanks for adding those points . However please clear some of my doubts .

    If today is Jan 2009 and I want to invest in tax saving funds for my tax saving , then what is recommended .

    1. Start SIP of 5,000 per month and take each payment locked in for 3 yrs from date of investment OR

    2. Keep accumulating the money and then invest all of it in lumpsum ..

    Your views are welcome .

    I totally agree with your views of not taking mutual funds solely on the "divident" declartiion , Its mainly a Knowledge issue . Good one .


  28. shailesh says:

    Hi Manish. I must say you have covered all the aspects which one must consider while choosing any MF scheme. I would like to add follwing points which may also be relevant in decision making:

    1. Dont start SIPs in Tax Saving MF scheme. Reason being, your money is locked for three years. Suppose, you have a SIP in Tax saving MF for three years, then it will take six years to unlock your money as each monthly SIP will have a lock in period of three years. If one is in need of money or he wants to switch to other better MF scheme due to bad performance of present scheme, then he cannot withdraw all his money at one go due to lock in of three yrs. If at all one wants to invest in Tax saving MF, Its better to invest your surplus cash in lumsum, ofcourse, depending upon present market conditions.

    2. Secondly, dont invest in MF mearly because it has recently declared dividend or has good dividend track record, of course, it is also imp factor in decision making but not the deciding one. Because, after all its your money which fund house uses for dividend payout and also NAV of the fund falls down to the extent of dividend paid. Dividend payment is a tool which fund houses use to attract investors' money. So B4 investing, one must gather other info as well all which is covered by Manish in his post.


  29. Oracle Developer says:

    More on comparison based on best mutual funds in Equity Diversifed Catagory will help to choose correct one in long term. May be taken only MF having tack record of 10 yrs plus. I am surprised to see miss for Franklin Templton MF in your list of MF as a chouce as it is also one of the older MF house after UTI.

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