Are you puzzled with the availability of so many mutual funds thinking of which ones to include in your portfolio? Sometimes it feels like finding a needle in a haystack. But what if you could simplify the process and choose funds that truly align with your financial aspirations? Whether you’re saving for retirement, a dream home, or your child’s education, having the right set of mutual funds in your portfolio can do wonders.

The key lies in understanding your financial goals, risk appetite, and investment horizon. But how do you safely steer through this jargon, compare performance, and avoid costly mistakes? Keep reading to learn how to select mutual funds that align with your financial goals.

Here is a list of factors you should consider while selecting mutual funds to make informed investment decisions:

Investment Objective

The most important factor that you need to keep in mind is to define your investment objectives clearly. Whatever you want to accomplish in your future whether it is purchasing a property, financing your child’s education, or preparing for retirement, keeping a know-how of your goal helps in selecting the most appropriate mutual funds.

Furthermore, different fund categories cater to different goals, like equity funds are most suitable for long-term aspirations exceeding 5 years and debt funds are beneficial for shorter horizons of less than 5 years. Other than this, there are hybrid or balanced funds that combine both the equity and debt components to facilitate investors with a middle ground with medium risk.

Time Horizon

The next crucial factor on our list is the time horizon. The crust is that your investment tenure will depend on the duration you have to reach your financial goals. Therefore investors must pick funds judiciously so that they can liquidate the amount well on time.

Risk Profile

The third factor to keep in mind is to understand and evaluate the risks associated with mutual funds. This will help them to align their investment strategy with their comfort level so that they remain on the safer side no matter how the market reacts. Talking about risks, the Securities and Exchange Board of India (SEBI) has categorized funds based on risk into five levels starting from low to high.

Fund Performance

Fourth on our list is to assess the past performance of the mutual fund. Performance helps in understanding how much returns and risk a particular fund has generated over a period of time. Investors should wisely compare fund performance with its category benchmark and peer groups and also check returns consistency and stability.

They should choose only those funds that have consistently outperformed the category average and its benchmark, however at the same time, you must know that past performance does not guarantee future performance.

Liquidity

The liquidity of a mutual fund is another important factor that you need to keep in mind at the time of fund selection. It refers to the ease with which you can buy or sell your mutual fund units. From a vast pool of funds, several ones come with a lock-in period, redemption limit, or exit load which makes fund liquidation tougher before a certain period. 

Therefore, one must choose funds that allow flexibility to redeem your money whenever you feel the need. For instance, short-term open-ended funds allow investors to redeem at any time without any penalty.

Expense Ratio and Exit Load

Another crucial factor to consider before investing is the expense ratio and exit load associated with mutual funds. The expense ratio is the annual fee charged by the Asset Management Company (AMC) for managing your money. 

Additionally, exit load is the fee charged by the AMC at the time of selling your mutual fund units.  They both eat into the net returns generated by your fund and therefore you should choose one with a lower expense ratio and exit load. However, it's essential to consider the value and quality of the services provided to not compromise on suitability for a lower fee.

Taxes

Last but not least, tax implications on your mutual funds are another important factor to take into consideration. Depending on the type and duration, mutual funds are taxed on the income and capital gains earned from it. 

For your information, gains from equity funds are taxed at 15% for short-term investments and 10% for long-term (more than a year) investments without indexation benefit. On the other hand, debt funds are taxed according to a specific slab rate.

Wrapping Up

In conclusion, choosing the right mutual fund doesn’t have to be so overwhelming. Investors can make informed decisions by focusing on your financial goals, risk tolerance, and investment horizon that set you up for success. Remember, it’s not about picking the “best” fund—it’s about finding the one that aligns with your unique financial needs. 

Take the time to evaluate performance, liquidity, fees, and tax implications. And don’t forget: consistency and patience are your greatest allies in the world of investing. Start small, stay disciplined, and watch your portfolio grow over time.

About the Author

Soumya is a specialised finance professional and as a MFD, he has managed more than USD 500 million worth of financial assets. His specialisation includes Private Equity, Bonds, Equity Research, Technical and fundamental analysis and Mutual Funds. As a founder of wealth redefine, he has been successfully managing some of the renowned professionals and families in India and abroad.