Picking a Fund: Checklist
The Problem: There are 2,000+ mutual funds in India. 90% are mediocre. How do you find the gems?
The Solution: A systematic checklist. Never skip it.
The 10-Point Fund Selection Checklist
✅ 1. Category Match (Does It Fit Your Goal?)
Rule: Pick category based on time horizon.
| Time Horizon | Category |
|---|---|
| 0-1 Year | Liquid Fund, Ultra Short-Term |
| 1-3 Years | Short Duration Debt, Arbitrage |
| 3-7 Years | Hybrid, Balanced Advantage |
| 7+ Years | Large Cap, Multi Cap, Index Funds |
Example:
- Goal: Retirement in 20 years.
- Right: Equity Multi Cap Fund.
- Wrong: Liquid Fund (Too conservative).
✅ 2. Past Performance (5Y, 10Y Consistency)
Check:
- 5-Year CAGR greater than Benchmark + 2%.
- 10-Year CAGR (If fund is old enough).
Where to Check: Valueresearchonline, Moneycontrol, Morningstar.
Red Flag: Fund that underperforms benchmark for 3+ years.
Example:
- Axis Bluechip: 5Y = 18.2%, Nifty 100 = 16.5%. ✅
- Random Fund X: 5Y = 12%, Nifty 100 = 16.5%. ❌
✅ 3. Expense Ratio (The Silent Tax)
| Fund Type | Good | Poor |
|---|---|---|
| Index Funds | less than 0.3% | greater than 0.5% |
| Actively Managed Equity | less than 1.5% | greater than 2% |
| Debt Funds | less than 0.5% | greater than 1% |
Always choose Direct Plan (0.5-1% lower expense).
Impact Over 20 Years:
- Fund A: 12% return, 0.5% expense = 11.5% net.
- Fund B: 12% return, 2% expense = 10% net.
- Difference: ₹15 Lakhs on ₹10L investment!
✅ 4. Fund Size (AUM Sweet Spot)
| AUM | Risk |
|---|---|
| less than ₹100 Cr | Too small (May shut down) |
| ₹500 Cr - ₹10,000 Cr | Sweet Spot ✅ |
| greater than ₹50,000 Cr | Too large (Inflexible in Mid/Small Cap) |
Why?:
- Small funds can shut down (Merge with another fund).
- Mega funds struggle to deploy cash (Can't buy enough small-cap stocks).
✅ 5. Fund Manager (Track Record)
Check:
- Tenure: greater than 3 years (Proven).
- Past Fund Performance: Did their previous funds do well?
Where to Check: Fund Fact Sheet (Manager name + tenure).
Red Flag: Manager changed recently (Strategy may change).
Example:
- Prashant Jain (HDFC Flexicap): 25+ years. Legend status.
- New Manager (6 months): Unproven. Wait and watch.
✅ 6. Portfolio Quality (Top 10 Holdings)
Check:
- Are Top 10 stocks recognized, quality companies?
- Is one sector dominating (greater than 40%)?
Good Portfolio:
- Top 10: HDFC Bank, Reliance, TCS, Infosys, Kotak (Blue-chips).
- Sector Diversified: Banking 25%, IT 15%, Auto 10%.
Bad Portfolio:
- Top 10: Unknown penny stocks.
- Banking = 60% (Too concentrated).
✅ 7. Rolling Returns (Not Point-to-Point)
Why?: Point-to-point returns can be "lucky".
Check: Fund should be in Top 25% in majority of 3-year rolling periods.
Where to Check: Morningstar, Valueresearch (Advanced tools).
✅ 8. Risk-Adjusted Returns (Sharpe Ratio)
Formula: (Fund Return - Risk-Free Rate) / Standard Deviation
| Sharpe Ratio | Rating |
|---|---|
| greater than 1.5 | Excellent ⭐⭐⭐ |
| 1 to 1.5 | Good ⭐⭐ |
| less than 1 | Poor ⭐ |
Why?: High returns are useless if you can't sleep at night (Too volatile).
✅ 9. Exit Load & Lock-in
| Exit Load | Meaning |
|---|---|
| 1% before 1 year | Standard (Acceptable) |
| 2% before 3 years | High (Avoid) |
| 0% | Great (Liquid Funds) |
| 3-year lock-in (ELSS) | Tax benefit trade-off ✅ |
Avoid: Funds with unusual exit loads (2% before 2 years).
✅ 10. Consistency Over Flash
Rule: A fund that gives consistent 15% for 10 years is better than one that gave 50% in 1 year, then -10% for 3 years.
Check: Standard Deviation (Volatility).
- Lower SD = More consistent.
Where to Check: Fund Fact Sheet, Valueresearch.
Bonus Checks (For Advanced Investors)
11. Portfolio Turnover
- less than 30%: Buy and Hold (Good).
- greater than 100%: Excessive trading (Tax inefficient).
12. Overlap with Existing Funds
- If you hold 3 Large Cap funds, Top 10 stocks will be same (Reliance, HDFC, TCS).
- Solution: Diversify categories (Large + Mid + Small).
13. Fund House Reputation
Trustworthy: HDFC, ICICI Pru, Axis, SBI, Kotak, Parag Parikh. Emerging: Quant, Motilal Oswal. Avoid: Funds with regulatory issues.
The Final Decision Framework
Step 1: Shortlist 3-5 funds in your category. Step 2: Apply this checklist. Step 3: Pick the top 2 (For diversification). Step 4: Start SIP. Hold for 5+ years. Step 5: Review annually. Don't churn every 6 months.
Common Mistakes to Avoid
Mistake 1: Chasing Last Year's Winner
- Fund gave 40% last year → Everyone invests.
- This year: Market corrects. Fund gives -5%.
- Solution: Look at 5Y, 10Y performance.
Mistake 2: Buying Too Many Funds
- "I'll buy Top 10 funds. Diversification!"
- Problem: All 10 hold the same stocks (Reliance, HDFC).
- Solution: Max 5-7 funds across categories.
Mistake 3: Ignoring Expense Ratio
- "0.5% difference won't matter."
- Reality: Costs you ₹10-20 Lakhs over 20 years.
Mistake 4: Panic Selling in Downturn
- Market crashes 20%.
- You: "This fund is useless!" (Sells).
- Reality: All equity funds fall in a crash. Stay invested.
7-Day Action Plan
Day 1: List your financial goals. Assign time horizons.
Day 2: For each goal, identify the right fund category (Equity/Debt/Hybrid).
Day 3: Go to Valueresearchonline. Filter funds by category. Sort by 5Y returns.
Day 4: Apply the 10-point checklist to shortlist top 3 funds.
Day 5: Read the Fact Sheet of all 3. Check portfolio quality and expense ratio.
Day 6: Start SIP in Direct Plan of the chosen fund (Via AMC website or Coin/Groww).
Day 7: Set a calendar reminder to review after 1 year. Not every month!
Quiz
Test Your Knowledge
Question 1 of 5
1. What is the ideal expense ratio for an Index Fund?
💡 Final Wisdom: "Picking a fund is like hiring an employee. Check credentials, track record, and cost. Don't hire the flashiest resume. Hire the most consistent performer."