How to Choose Mutual Funds in India in 2026

Mutual fund selection is based on several parameters. These include return expectation, risk tolerance, and investment horizon. There are several parameters to consider when selecting a fund, including expense ratio, past performance, fund manager experience, and assets under management.

Once you, as an investor, do your research, you will have a clear idea of where you want to invest. And what type of category or funds? 

How to choose mutual funds is a common question. Here is a guide to mutual fund investing that you may consider when selecting mutual funds.

Goals

This is the basic. When you invest in a mutual fund, keep your target in mind. That is, what is the purpose of investment? How long are you planning to hold your investment, and what return expectations do you have?

In the absence of a clear goal, you may want to exit your investment for small fluctuations.

A goal can be short-term, such as purchasing utility goods, making a down payment on a house, or taking an international holiday. It can be for the long term as well, such as retirement or a college education for children.

Depending upon why you are investing, you will know how to choose the best mutual funds to select the mutual fund type. It can be a debt, equity, or hybrid mutual fund.

For example, some investors' main investment objective is to achieve capital appreciation. For others, it may be tax saving. 

Risk

A significant criterion for selecting mutual funds is analysing the associated risk.

Risk comes from not knowing what you are getting into. Before choosing a mutual fund, the investor should analyse the associated risks. And he/she has to check if the risk is comfortable. 

Equity mutual fund investments are subject to market fluctuations. Therefore, an equity-oriented portfolio could also experience volatility in the short term. But note that the returns can be substantially higher than those of other types of funds. These types of funds might be suitable for long-term aggressive investors. 

Debt mutual funds are comparatively more stable. However, the returns could be lower than those of equity funds.  These might be suitable for conservative investors. You can use the table below to determine the category you fall into based on your time horizon and risk profile, and select the appropriate mutual fund for yourself.

Liquidity

Another factor to consider when selecting mutual funds for SIP is liquidity.

Investors should know when he/she may require the investment. That is, if the need is in the near future, it’s not for equity mutual funds. This is because it may not provide the expected return.

If you can hold the investment for one year or more, equity mutual funds can deliver the expected returns. This is also important because compounding works best when money is left untouched for long periods. So, if you want to raise money for a short period, go for liquid funds. 

Investment Strategy

While identifying how to select the best mutual fund, most investors ignore the aspect of investing strategy. But it holds a crucial place in the success of your investment portfolio.

An investment strategy is also referred to as the investment approach. It is a strategy that fund houses adopt for making all investment decisions. If the fund house's investment strategy does not align with your investment philosophy, a conflict of interest will arise. And ultimately leading to you exiting the investments at undesirable prices. 

Fund Performance

Fund performance matters. It should be considered for a reasonable time frame. This is to ensure that the investments have gone through multiple market cycles. This would enable consistent returns over a period.

If the fund has not beaten its benchmark over three, five, seven, or ten years, it is reasonable to believe the fund might not be a good investment.

When evaluating a fund’s performance, it is important to review the performance details of the fund manager or management team. A strong, stable, experienced Fund management team with reasonable tenure and a proven track record would prove beneficial for investors.  

Expense Ratio

The expense ratio is the commission or the fee charged by the investors for the proper management of their investments. It is basically the fund manager’s fee levied on all investors to ensure profits across investments.

As an investor, you should target mutual funds with a lower expense ratio. This is because the percentage may seem quite small, but when calculated across your total investment portfolio, it will have a larger impact.

The expense ratio is a derivative of Assets Under Management, and it is believed that the higher the AUM, the lower the expense ratio. 

Entry And Exit Load

Entry load refers to the fee charged by fund houses from investors.

Exit load refers to the fee charged when exiting a mutual fund scheme. This is chargeable only if investors exit within a short period. This is to discourage quick exit and immediate outflow of cash from fund houses. 

The entry load has, however, been removed by most fund houses.

As an investor, you must look out for mutual fund schemes that have zero or minimal entry and exit loads.

Taxation  

When you, as an investor, make money (returns) from your investment, it is taxable as per the Income Tax Act.

When equity fund units are redeemed, the returns are taxable based on the holding period.

For equity funds, Long-Term Capital Gains (holding period of 12 months and above) are taxed at 12.5% over and above the exemption limit of ₹1.25 Lakh.

Short-Term Capital Gains (holding period of less than 12 months) are taxed at 20%.

For Debt funds, all gains are taxed at your income slab with no LTCG benefit for funds purchased after 1 April 2023.

Direct Plans 

There are two types of plans available for a mutual fund scheme: direct and regular.

Direct and regular Mutual Funds are different versions of the same plan.

In the case of direct, investors can buy the required NAV units directly from the concerned fund house. In the case of regular, the units have to be purchased through a commissioner or broker. 

A key difference between the two is that returns are slightly higher in a direct Mutual Fund as no commission expenses are incurred. This commission varies between 1-1.25%, depending upon the asset management company and brokerage firm.

In the case of regular Mutual Funds, the concerned Asset Management Company (AMC) pays a commission to the brokerage firm to increase its clientele. This reduces the principal amount of investment, thereby reducing the total returns generated. 

Earlier, when mutual funds were just introduced in India, going the regular route made sense due to a lack of awareness. However, now there are many platforms that offer you the necessary resources to make investment decisions. So you need not always be dependent on agents for advice. Also, you may consider using this guide to find answers to how to select mutual funds as well.

Happy Investing!