A single investment product would fail to meet the unique financial objectives of each investor. Mutual fund houses provide different types of schemes to meet the various requirements of individuals.

The wide choice of mutual fund (MF) schemes may make it difficult to choose the right fund. Here is a five-step guide that will help you select the most appropriate mutual fund for your investment portfolio

1. Identify your investment goals and risk profile
Before you decide to invest in mutual funds, you need to identify your investment goals. You must clearly decide if you are looking for long-term gains or periodic returns. In addition, it is necessary to determine if you need the money for paying educational expenses, building a retirement corpus, funding wedding expenses, or any other purpose. Knowing your specific goals will help you shortlist the schemes that meet these requirements.

Another important consideration is your risk profile. Are you willing to assume higher risks with the potential to earn more returns? Are you looking for safe investment avenues that possibly provide regular but lower returns? Consider all these aspects to find the best mutual funds to invest in.

2. Know the type of fund
If you want to remain invested for a longer period and are willing to assume higher risks, choosing equity based schemes is recommended. Such schemes invest a larger portion of the fund corpus in equities, which provide the opportunity to earn higher returns. However, since the stock market is volatile, such funds are risky in the short term.

Alternatively, if you are looking for regular income, you must purchase debt MF schemes. The funds are invested in debt instruments, such as bonds and time deposits, which provide a regular dividend income.

You may want to remain invested for a longer duration without assuming the risk of equity funds. In such cases, opting for balanced funds is advisable. The corpus is invested in equities as well as debt to provide reasonable returns on your investments.

3. Consider the fees and charges
Mutual fund houses levy different types of fees and charges. Some of these include entry or exit load and management fees. The entry load is payable when you invest in the scheme while the exit load is charged at the time of redeeming your mutual fund investments. In addition, the fund houses may levy management fees for professionally managing the corpus. It is important you clearly understand these different charges as these affect your effective rate of return. Conducting extensive research about such fees online will help you make an informed decision.

4. Analyse fund performance and history
MFs are professionally managed by experienced fund managers. They use their knowledge and skills to make investment decisions based on the overall fund philosophy. You must research the performances of different funds before investing in these products. Some of the factors to consider are as follows:

• Has the fund manager consistently delivered returns that are higher or comparable to market returns?
• How much volatility did the scheme have when compared with the benchmark index?
• Did the fund manager frequently modify the portfolio of the corpus?

Having these details is crucial to understand the fund managers’ performances under different market conditions. Furthermore, you will gain an insight into the past returns that will be beneficial in making the right investment decision.

5. Determine the fund size
Although the size of the fund does not affect its capability of delivering superior returns, there are some situations when the size may be too big. In such cases, the fund may have to modify the investment philosophy and process to accommodate the increase in the number of investors. This may affect the performance and returns of the fund. There are no rules that clearly define big; however, large fund size makes it difficult for fund managers to purchase or sell shares without affecting their price. Furthermore, it eliminates the opportunity of managing the corpus without drawing attention. Any decision made by the fund manager is closely watched by other players in the market, which does not provide anonymity.

Knowing your financial goals and risk profile will help you choose the best mutual fund. Conducting thorough research on past performance, fund managers, and other related factors will further simplify the decision-making process. Following the aforementioned steps will help you arrive at the right choice and provide you with the opportunity to earn higher returns and maximise your benefits.