What else to look for when choosing a Mutual Fund?

1. Define Your Investment Goals

   Before choosing a mutual fund investment, it helps to be clear about why you are investing. Your financial goals guide everything, right from how much to invest to what type of funds to select. Clear goals also keep you disciplined and prevent impulsive decisions during market swings.

   When setting your investment goals, consider:

   • Purpose: Are you saving for short-term needs like a holiday or long-term goals such as retirement or education?

   • Amount required: Estimate how much money you will need to meet that goal.

   • Time frame: Decide how long you can stay invested before you need the money.

   • Risk comfort: Choose funds that match your tolerance for mutual fund risk.

     Well-defined goals help you build a portfolio of mutual funds that stays aligned with your financial priorities.

      

2. Focus on Your Investment Horizon

   Your investment horizon is the time duration for which you plan to stay invested in the mutual fund scheme. Here’s how you can think about it:

   • Short-term: Consider low risk mutual funds like liquid or ultra-short-duration funds for easier access and stability.

   • Medium-term: Hybrid or balanced funds may work well, combining equity for potential growth and debt for relative stability.

   • Long-term: Equity mutual funds can help you benefit from market growth potential over time.

     Matching your investment horizon with suitable funds ensures that your mutual fund investment remains aligned with your objectives and comfort level.

      

3. Assess Your Risk Profile

   Every mutual fund carries a certain level of mutual fund risk, and understanding your own risk tolerance is an important first step before investing.

   • Equity funds are market-linked and tend to fluctuate more, making them more suitable for investors with a higher risk appetite.

   • Debt funds generally carry relatively lower levels of risk and tend to be less volatile than equity funds.

   • Hybrid funds combine both equity and debt, aiming to balance growth potential and stability.

   If you prefer a more cautious approach, you can explore low risk SIP options that invest in short-duration or conservative funds. Matching your fund type with your comfort level helps keep your investments aligned with your goals through changing market conditions.

    

4. Understand the Expense Ratio

   A mutual fund’s expense ratio or total expense ratio (TER) represents the annual fee charged by the fund house to manage your investment. It includes administrative costs, fund management fees, and distribution expenses. A lower total expense ratio means that a smaller portion of your returns goes toward expenses, allowing more of your money to remain invested. 

   However, the relevance of this cost depends on the type of mutual fund you choose:

   • Active mutual funds: These are managed by professional fund managers who make research-driven decisions to achieve the fund’s objectives. A slightly higher expense ratio in such funds can be reasonable, as it reflects the cost of active management and research.

   • Passive mutual funds or index funds: These funds track a benchmark index such as the Nifty 50 or Sensex. Since they do not aim to outperform the index, a low expense ratio mutual fund becomes particularly important here, as costs directly affect overall returns.

     When evaluating funds, you can compare expense ratios within similar categories to understand cost efficiency. 

      

5. Evaluate Fund Manager Expertise

   The mutual fund manager plays a key role in investment performance. Their decisions about asset allocation, timing, and diversification determine how your money grows.

   When reviewing a fund:

   • Check the experience and track record of the fund manager.

   • Review how they have managed market ups and downs in the past.

   • Look for consistency rather than short-term outperformance.

     An experienced mutual fund manager supported by strong capital fund management practices and research can make a significant difference in long-term results.

      

6. Consider Liquidity and Exit Load

   When choosing a mutual fund investment, it’s important to know both the exit load and the liquidity of your chosen scheme. These factors affect how easily you can access your money and what it might cost to withdraw it early.

   Here’s what to keep in mind:

   • Exit load: Some mutual funds charge a small fee if you redeem your units within a specific period, usually up to 12 months. This cost helps promote investor discipline and reduces sudden redemptions.

   • Liquidity: Open-ended mutual funds allow redemptions at the Net Asset Value (NAV) on any business day, offering high liquidity. Closed-ended mutual funds, however, can only be redeemed after the maturity period, though they may be traded on stock exchanges if listed.

     Understanding both exit load and liquidity helps you choose low risk mutual funds and SIP options that align with your time horizon and financial needs

7. Review Tax Efficiency

   Taxation plays an important role in determining your mutual fund investment returns. Understanding how different funds are taxed helps you plan better and avoid surprises at the time of redemption.

   As per the Income Tax Act, 1961, mutual fund investments are taxed as per the scheme type and holding period: 

   • Equity Mutual Funds

     • Gains from investments held for less than 12 months are treated as short-term capital gains (STCG) and taxed at 20%.

     • Gains from investments held for more than 12 months are considered long-term capital gains (LTCG) and taxed at 12.5%, with an exemption of up to ₹1.25 lakh per financial year.

     • Equity Linked Savings Schemes (ELSS) offer tax deductions under Section 80C, but come with a three-years lock-in period.

        

   • Debt Mutual Funds

     • For investments made on or after April 1, 2023, capital gains made from debt mutual funds are added to your total annual income and taxed as per the applicable income tax slab.

     • Debt funds do not offer indexation benefits for new investments made after this date.

        

   • Hybrid and Other Mutual Funds

     The tax treatment of hybrid mutual funds depends on their asset allocation. In India, an aggressive hybrid fund investing more than 65% in equity or equity-related instruments is taxed like an equity fund, while a conservative hybrid fund investing more than 65% in debt and money market instruments is taxed like a debt fund.  

     Further, a fund investing less than 65% in equity or equity-related instruments and allocation towards debt and money market instruments is also less than 65% then, such fund should be taxed as non-equity oriented mutual funds. The capital gains made from such funds are to be categorised as short-term capital gain if the units are held for less than 24 months and taxed as per the applicable income-tax slab rates. In case the units are held for more than 24 months then, such gain to be classified as long-term capital gain and taxed at 12.5% without any exemption.

      

From 1st April 2023, capital gains from units of “specified mutual fund schemes” are taxed as short-term capital gains at applicable slab rates, regardless of the holding period. A “specified mutual fund” is one that invests 35% or less of its total proceeds in equity shares of domestic companies.

The Finance Act (No. 2), 2024 changed the definition of specified mutual funds. Effective 1st April 2026, the term will refer to:

1. mutual fund schemes investing over 65% in debt and money market instruments, and

2. Funds of Funds (FoFs) investing 65% or more in such schemes.
    

Knowing how taxes apply to your portfolio of mutual funds helps you make informed decisions and improve the post-tax efficiency of your investments.