The Mutual Fund Advisor: Choosing the right fund: A 5-step shortcut that actually works
Forget star ratings and tips — use a simple checklist to pick funds you can hold for a decade.Whenever someone meets me for the first time and finds out what I do, the question is almost guaranteed: “Ek baat bataiye — abhi kaun sa fund sabse best hai?”To me, that’s like buying a car by asking, “Which car did the fastest 0–100 kmph last month?” With mutual funds, you don’t start with the “best” fund. You start with where it fits in your life — your goals, time frame and your ability to sit through ups and downs.Over the years, I’ve come to rely on a simple five-step checklist. It’s also broadly what we use under the hood at Value Research Fund Advisor for our recommended list, with far more data and number-crunching.Step 1: I start with the category, not the “best” fundMost investors pick the fund first and worry about risk later. I do it the other way round. I begin by asking what this money is for and when it will be needed. If the cash is required within the next three years, I stick to debt funds or very conservative options. If the horizon is between three and five years, I move up the risk ladder slightly and consider equity savings funds or balanced-advantage funds. When the time frame stretches beyond five to seven years, I am comfortable using equity funds or equity-oriented hybrid funds.Then I think honestly about volatility. How much of a fall can I live with without panicking? If a 20–30 per cent fall will make you redeem in anger or fear, then even for long-term goals, you probably need a more conservative mix.I also look at how many funds are already in the portfolio. Most people don’t need more than two to four well-chosen funds. A large collection of overlapping schemes is not diversification; it is clutter. Only after I have clarity on the time frame, risk comfort, and existing clutter do I decide whether I want a large-cap fund, a flexi-cap, an ELSS, or a short-duration debt fund.When you look at the numbers, this way of thinking quickly makes sense. Over the past three years, debt funds have delivered an average of about 7 per cent. When you extend the horizon to five-year periods, hybrid funds and equity funds have averaged about 12 per cent and 14 per cent, respectively.Step 2: I look at the long-term track record and rolling returnsOnce you’ve chosen the right category, you’re still faced with a long list of funds. This is the point where many investors get hypnotised by the latest one-year return. I ignore that completely. What I want to know is simpler and far more important: has this fund created wealth over a full market cycle?For equity funds, I like to see at least seven to ten years of history, or as much as is available for relatively newer categories. I focus on two things. The first is the long-term CAGR compared to the category and the index. If the five- to ten-year return is not meaningfully ahead of its benchmark and the category average, I lose interest very quickly; a fund that can’t beat its own basic reference point over long stretches of time doesn’t deserve a place in a long-term portfolio.The second thing I look at is rolling returns. Instead of focusing on just one ten-year number, I examine how the fund has performed across all possible three- and five-year periods in the past.Take a good flexi-cap fund, for example. As of December 03, 2025, its ten-year CAGR is about 15.3 per cent, slightly ahead of the BSE 500 Index and the category average, both of which are close to 14.8 per cent. On the surface, this looks like a small difference, but over long periods, even a one percentage point lead compounds into a meaningful gap.Now look at how the journey unfolded through rolling five-year returns. Over the last five years, this fund’s returns have swung from a low of about –1.88 per cent to a high of about 32.77 per cent. The benchmark, over the same set of rolling periods, ranged from roughly –0.96 per cent to about 28.94 per cent. The ride was bumpy for both, but the fund generally stayed a little ahead. At Value Research Fund Advisor, this combination of long-term outperformance and decent rolling behaviour is our first big sieve. Many “fancy” funds that look great in a single snapshot don’t make it past this stage.Step 3: I prefer consistency over one-off superstarsEvery year, you will find one or two funds that have had a brilliant run and suddenly top every ranking list. A couple of years later, they vanish from conversation, and a new set of names takes their place. I’m not interested in these one-off superstars. I want funds that keep turning up, year after year, in roughly the top half of their category.To judge this, I look at the fund’s performance across calendar years. I check how many times in the last five to ten years it has beaten its benchmark and how often it has stayed ahead of the category average. I also see whether it usually shows up in the top 25–50 per cent of funds in its category, or whether it keeps swinging from the top to the bottom and back again.Go back to the same flexi-cap example. Over the last eleven calendar years, this fund has beaten its benchmark in six of them and has stayed ahead of the category average in eight. It is not perfect — there are years when it slipped — but the overall pattern leans clearly towards more hits than misses. Even if a fund is never “No. 1” in any single year, this kind of steady reliability is far more useful for someone running SIPs for a decade than a fund that occasionally dazzles and often disappoints.Step 4: I always study how the fund behaves in bad timesThe real character of a fund shows up when markets fall. In a bull run, almost everything looks smart and well-managed. So I always go back to the big stress periods — the COVID crash, earlier bear markets, sharp corrections — and see how the fund held up when things were truly uncomfortable.I look at how much the index fell at the worst point and how much the fund fell alongside it. If the fund fell dramatically more than its benchmark or peers, that is a red flag. Then I check how long it took to climb back to its previous high and how that recovery time compares with the index.During the COVID crash from January to March 2020, for instance, the BSE 500 fell about 38.4 per cent, while our selected flexi cap slipped around 37.3 per cent. Both took roughly eight months after the March 2020 bottom to climb back to their earlier highs. In this case, the fund broadly tracked the market.When we evaluate funds at Value Research Fund Advisor, this downside behaviour is central, not a side note. If your fund falls less and recovers sensibly, you are far more likely to stay invested.Step 5: Finally, I check costs and basic hygieneOnly after all this do I come to costs and hygiene factors. By now, the list of candidates is much shorter, and I am generally choosing between a few reasonably solid options.At this stage, I review the expense ratio and ensure it is within a sensible range for that category. For an actively managed fund, if the expense ratio is much higher than its peers, there needs to be an exceptional justification in the form of consistent, meaningful outperformance.I also pay attention to the fund’s size and liquidity. If a fund is too small, it may struggle to run its strategy efficiently; if it is too large with a very narrow approach, it may become clumsy. Then I look at the fund manager and process stability. Has the manager changed every year, or is there continuity? Is there a clear investment process, or is it just one star manager’s mood driving decisions?Finally, I do a quick portfolio sanity check. I don’t want to see concentration in one or two obscure stocks, or in extreme bets that don’t align with what the fund claims to be.How most people do it — and how you can do betterIf I look at how most investors actually pick funds, the sequence is almost upside down. It usually starts with someone’s “tip” or a social media recommendation, followed by a glance at the highest one-year or three-year return. Then come the comfort factors: a big brand name and a good star rating. Only at the very end, if at all, does the question arise: “Is this suitable for me?”That is how you end up with a portfolio you can’t live with.If you simply flip the order, you get a very different result. Start with the category and your true risk comfort. Then look at long-term history and rolling returns. After that, check for consistency. Then see how the fund behaves in bad times. Finally, look at cost and hygiene.You can follow this framework yourself with a bit of time and discipline. Or you can let Value Research Fund Advisor do this work in the background and give you a short, curated list matched to your goals and risk profile. Either way, the core idea is simple:Good investing isn’t about discovering a magical, perfect fund. It’s about picking a sensible fund in the right category, and then giving it a decade.(Sneha Suri is Lead Fund Analyst – Value Research’s Fund Advisor)
