How to Choose a Mutual Fund — In the Right Order

Everything follows from this and it takes one sentence to answer.

Under three years, and no equity category is appropriate regardless of how it has performed. That money belongs in a deposit or a low-risk category, and no amount of scheme selection changes it. Between three and seven, it depends on how movable the date genuinely is. Beyond seven or ten years, there is room for the sharper-moving categories.

If you cannot answer the question, that is the actual problem to solve first. A goal without a date is not a goal, and it usually turns out to be several different goals that need separating, as our page on running more than one SIP explains.

The horizon narrows the category. Your own behaviour narrows it further, and this is the part people answer optimistically.

The question is not whether you can tolerate risk in principle. It is what you actually did, or would do, when a holding is down thirty percent and every headline agrees it will get worse. Somebody who would stop the SIP should not be in the sharpest-moving category, whatever the horizon allows, because a plan you abandon returns nothing.

The categories themselves are set out on our pages about large, mid and small cap funds, debt funds and hybrid funds. Read them for what each holds rather than for which sounds most promising.

By this point the field is small, and the things worth comparing are fewer than the internet suggests.

• Does it actually do what its category says? The scheme documents state the mandate, and reading them is unfashionable and useful.
• Cost. The expense ratio applies every year regardless of outcome and is knowable in advance, which is why it deserves attention out of proportion to how dull it is. See expense ratio.
• Consistency against its own category over long periods, not one strong year, and understood properly rather than from a screenshot.
• Whether you would still hold it after a poor stretch, which is a question about you rather than the scheme.

Two of those four are about the scheme and two are about you, which is roughly the right proportion. Most fund comparison content is entirely about the scheme, which is why it feels thorough and leaves people no better placed to decide.

Notice what is not on that list: last year\'s ranking, a star rating, and whatever a colleague is enthusiastic about.

They are not useless and they are not what most people treat them as.

What they can show is whether a scheme behaved the way its mandate said it would, how it held up during a genuinely bad stretch, and whether the pattern has been consistent across different conditions. Those are properties worth knowing.

What they cannot do is predict. A scheme at the top of a one-year table has usually been helped by conditions favouring its style, and those conditions change. Buying the top of the table is how investors reliably arrive late, which our guide on what a red number actually means touches on from the other direction.

One more thing worth checking, and it is easily missed: whether the scheme you are looking at has had the same mandate throughout the period shown. A scheme that changed category two years ago has a track record belonging partly to a different thing, and the chart will not tell you that.

And a number without a period attached tells you nothing at all. Ask which years it covers before reading anything into it.

For what it is worth, this is the actual order of a first conversation here, and only the last item concerns schemes.

• Is there an accessible buffer? If not, that comes first, as our page on building an emergency fund sets out. An investment made before a buffer exists usually gets redeemed to serve as one.
• Is there expensive borrowing? Clearing it has a certain outcome where no investment does.
• What is the money for, and when?
• What happened the last time something you owned fell in value?
• What already exists, including folios you may have forgotten, which our guide on finding old mutual fund investments helps with.

Notice that none of those five questions is about markets. That is deliberate, and it is the difference between a plan and a purchase. A purchase asks what to buy today; a plan asks what this money is for, and the answer to the second one determines the first.

Most people expect that conversation to start with schemes and are surprised when it does not. If you would like to have it, get in touch; it costs nothing and we will tell you where the honest answer is a deposit rather than a fund. If you are starting from the very beginning, what a mutual fund is is the better first page.