How to choose a mutual fund: a six-step check
Aeterna Wealth · figures from our fund data, updated 5 Nov 2026
Pick the category first (it decides most of the risk), then compare funds only within it: against the category's total-return index over rolling 3-year periods, on how they held up in falls, on cost, and on how much they overlap with what you already own. Recent 1-year returns are the weakest guide of all.
1. Start with the category, not the fund
The SEBI category (large cap, mid cap, flexi cap and so on) decides most of a fund's risk and return. Choose it from your time frame: large and flexi cap for money you need in 5 years or more; mid and small cap only for 7 to 10 years or more.
2. Compare against the right index
A fund should be measured against its own category's total-return index, which includes dividends. Over the last 3 years, only 116 of 232 diversified Regular plans beat theirs. In large caps, only 12 of 30 did.
3. Use rolling returns, not one period
A single 3-year return depends heavily on the start and end dates. Look at every 3-year window: how often the fund was ahead of its index, and by how much in the bad periods. Our fund pages show this for every fund.
4. Check how it behaves in falls
Downside capture shows how much of the index's fall a fund took. A fund that falls less recovers faster and is easier to hold on to.
5. Compare the cost
Expense ratios are a guaranteed drag. A typical large cap Regular plan costs about 2.21% a year; a Nifty 50 index fund's Direct plan can cost 0.10%.
6. Check overlap with what you own
Among the five largest large cap funds, any two share about 50% of their portfolios. A second fund that holds the same stocks adds cost, not diversification.
What not to rely on
- Last year's top performer: in our backtest, top-rated funds did not keep beating their index more often than the average fund.
- Star ratings alone, NFO launches and fund size on its own.
- A fund's name: check the portfolio and the SEBI category.
Common questions
How many mutual funds should I own?
Usually 4 to 6 equity funds across categories are enough; more often means more overlap.
Are past returns useful at all?
Consistency against the index over many rolling periods is more useful than any single return figure, but none of it predicts the future.
Should I choose by fund size?
Size alone says little. Very large small cap funds can find it harder to buy and sell stocks, which can hold returns back.
Want this worked out for your money?
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More guides
- Regular vs Direct mutual funds: what the extra cost buys
- SIP or lump sum? What the data says
- Mutual fund overlap: why owning six funds can mean owning one
- Tax on mutual fund gains in 2025-26: LTCG, STCG and how to save
- PMS vs mutual funds: costs, tax and who each suits
- Index funds vs active funds in India: who wins?
General information, not investment or tax advice for your situation. Mutual fund investments are subject to market risks; read all scheme-related documents carefully. Past performance does not guarantee future returns.