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Choosing the right mutual fund can feel overwhelming, when every scheme claims to be the “best mutual fund to invest in.” Each category comes with multiple subtypes, and every option is built for a different financial goal. The real challenge isn’t the number of funds available, it’s identifying which one aligns with your goals.
Once you know how to compare mutual funds and other factors like performance, expense ratios, and overall consistency, selecting the top mutual fund becomes far simpler. In this blog, we’ll walk you through how to choose best mutual funds to invest in 2026 for long term.
While you research the best mutual funds for 2026, whether for long-term investing or for starting a SIP, you must evaluate a few key parameters such as:
Before choosing a good mutual fund, define your goal. Ask yourself why you are investing, how long you plan to stay invested and what returns you expect. Without a clear goal, even small market fluctuations may tempt you to exit early.
Your goal can be short term, like buying a gadget, planning a vacation, or making a home down payment or long term, such as retirement or your child’s education. Once you know your purpose, it becomes easier to mutual fund selection. Depending on your needs, you may select a debt fund, equity fund, or hybrid fund.
When evaluating a good mutual fund, most investors start by checking its returns, but this shouldn’t be the only factor. Instead of relying only on CAGR, you must look at rolling returns, which show how consistently the fund has performed over different periods, such as 5 or 10 years. Investors can find rolling return in mutual fund factsheet, and many trusted financial websites also display it clearly.
I’ve already written a blog on how to read a mutual fund factsheet, you can check that out as well.
Checking 1-year, 3-year, and 5-year returns helps you understand the fund’s past performance, but remember, past returns are not a guarantee of future results. Use returns as one parameter, not the only one, to find answer of how to select mutual funds.
A benchmark index helps you judge how well a fund manager is performing. It acts as a reference to compare the fund’s returns. If a fund consistently performs better than its benchmark, it indicates effective management. For example, a large-cap fund should ideally beat indices like Nifty 50 or Sensex. If it regularly falls behind, you should check the reasons. Comparing a fund’s returns with its benchmark gives a clearer picture than looking at returns alone.
Expense ratio is the fee a fund house charges for managing your investment. It’s an annual percentage deducted directly from the fund’s assets, which means it affects your returns. A lower expense ratio is generally better, especially over the long term. SEBI has set limits on how much fund houses can charge, but they can decide their fees within those limits. When comparing mutual funds, always check the expense ratio to know what you’re paying for the fund’s management.
An entry load is a fee charged when you invest in a mutual fund. Most fund houses no longer charge it. An exit load is a fee charged when you redeem your investment, usually applied if you exit within a short period. As an investor, choose funds that have zero or very low entry and exit loads.
A fund’s performance depends on the fund manager and the fund house behind it. Check the manager’s experience and consistency, as well as how other funds from the same fund house have performed.
Also, verify if the fund manager has changed recently. If the returns you see were generated by a previous manager, the fund’s future performance and risk profile may change. Always review this before investing.
When comparing equity mutual funds, looking at risk metrics is very important:
- 1. Standard Deviation: Standard deviation shows how much a fund’s returns move up or down from the average. A high standard deviation means the fund’s returns vary a lot, indicating higher risk. A low standard deviation means the returns are more stable.
- 2. Sharpe Ratio: Sharpe Ratio tells you how well a fund balances its returns with the risk it takes. Higher the Sharpe Ratio, the better the fund is at delivering good returns for the level of risk involved.
- 3. Sortino Ratio: Sortino Ratio is similar to the Sharpe Ratio but measures only downside risk. A higher Sortino Ratio indicates the fund is generating better returns with lower chances of negative performance.
- 4. Alpha: Alpha shows how well a fund manager is doing compared to the benchmark. Positive alpha means the fund is outperforming while negative alpha means it’s falling short.
- 5. Beta: Beta shows how much a fund's returns move compared to its benchmark. A beta above 1 means the fund is more volatile it might give higher returns in a rising market but could drop more in a downturn. A beta below 1 indicates less volatility. Understanding beta helps investors gauge the extra risk they’re taking for potential rewards.
Allocation Across Market Caps
This shows how a fund invests across large-cap, mid-cap, and small-cap stocks. A balanced allocation helps manage risk while providing different levels of growth potential. Large caps add stability, mid caps offer moderate growth, and small caps bring higher but riskier growth.
Number of Securities
This indicates how many stocks the fund holds. A fund with more securities is generally better diversified, meaning the impact of any single stock’s poor performance is lower. Well diversification helps reduce overall risk.
Mutual funds come in two version, Direct and Regular. Both belong to the same scheme but differ in how they are purchased and the cost involved.
In a Direct Plan, investors buy units directly from the fund house. No middlemen or brokers are involved. In a Regular Plan, units are bought through a distributor or broker. AMC pays them a commission to bring in investors.
Because Direct Plans do not include this commission cost, they generally deliver slightly higher returns. The commission in Regular Plans usually ranges between 1% and 1.25%, depending on the AMC and the broker. commission deducted in Regular Plans reduces the effective investment amount and, in turn, lowers the total returns.
Average Maturity
When it comes to debt mutual funds, one of the key things you’ll hear about is average maturity. But what does that mean? In debt mutual funds, average maturity shows the average time it will take for the bonds in the fund to mature. It helps you understand how sensitive the fund is to interest rate changes. Longer maturity means the bond prices can fluctuate more when interest rates move, making the fund more volatile. Shorter maturity funds react less to rate changes and are generally more stable.
Let’s Break It Down
Suppose a debt fund invests 70% of its money in bonds that mature in 4 years and the remaining 30% in bonds that mature in 1 year. The weighted average maturity here would be:
(70% × 4) + (30% × 1) = 3.1 years.
What does this tell you? A fund with a 3.1 year maturity will react more sharply to interest rate changes compared to a fund with an average maturity closer to, say, 1.5 years. If interest rates rise, the fund’s value might drop significantly and vice versa.
Modified Duration
Modified duration shows how much a debt fund’s price will change if interest rates move by 1%. A higher modified duration means the fund is more sensitive to rate changes and can see bigger price swings. If you prefer stability, look for funds with a lower modified duration, as they react less to interest rate movements.
Yield to Maturity
YTM estimates the annual return a debt fund can earn if all its bonds are held until maturity. It reflects both the quality and the earning potential of the bonds in the portfolio. A higher YTM can indicate the possibility of higher returns, but it may also involve higher risk. Always assess YTM along with the fund’s overall risk profile.
Portfolio Holdings
The sectors and companies a fund invests in reveal its investment strategy. This helps you judge whether the fund’s focus matches your goals and risk appetite. For example, a fund that invests heavily in government securities is generally low-risk but may offer lower returns. Understanding this exposure helps you assess both the risks and opportunities within the fund.
Credit Rating
Here’s credit rating steps in, it’s like a report card for bonds. It tells you how likely a bond issuer is to repay its loans.
For example
- AAA rated bonds are the gold standard, they’re the safest but may offer lower returns.
- Bonds with lower ratings like BB or below come with higher risk but also higher potential rewards.
- Credit ratings are issued by agencies and range from AAA (top notch) to D (default). Higher the rating, the more reliable the bond issuer is likely to be. Corporate bonds with lower ratings may need to offer higher interest rates to attract investors but that’s because they carry a bigger risk of default.
Final Words
Hope you have got the answer to your question on how to select mutual funds. Choosing the best mutual funds for 2026 doesn’t have to be difficult. Once you know your financial goals, it becomes easier to shortlist funds based on performance consistency, risk, expenses, and the fund manager’s track record. By checking these key factors, you’ll understand how to choose a good mutual fund that suits your needs.
FAQs on How to Select Best Mutual Funds
How should I assess the performance of a mutual fund?
Look at both short term and longterm returns especially 3-5 years for equity funds. Compare lump sum and SIP returns to understand performance differences based on investment methods.
What is the significance of expense ratio in mutual fund evaluation?
Expense ratio shows annual fund management fees. Lower ratios mean higher returns for you, so always check this to see how fees impact your investment growth.
How do I evaluate the risk associated with investing in a mutual fund?
Assess risk using ratios like standard deviation, Sharpe or Sortino. These show how well the fund balances returns and risks, helping you decide based on your comfort with risk.
Why is it important to review a mutual fund's portfolio holdings?
Checking the portfolio reveals where the fund invests and its sector focus. This helps ensure its strategy matches your goals and avoids too much overlap with other funds you own.
What mistakes should investors avoid when comparing funds?
Don’t rely only on shorterm returns or a single factor like returns. Consider longterm performance, consistency, portfolio details and the fund manager’s track record for a full evaluation.
How do I select the best mutual fund for SIP?
To select the best mutual funds for SIP, define your goal, check long-term performance, rolling returns, expense ratio, fund manager stability, and choose funds that match your risk profile.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
