How To Choose The Best Mutual Fund In India In 2025?

We’ve all heard of ‘Mutual Fund Sahi Hai’, however knowing which fund is right for your needs is a tough choice. If you want to begin your mutual fund investment but are confused about where to begin - you are at the right place. By the end of this article, you will be able to pick and build your mutual fund portfolio independently. 

To do this, you must go through three phases: First, know your investment persona. This will tell you the right mix of equity, debt, or hybrid funds you should consider. Second, understand each metric and how to assess different fund categories. Third, compare and choose the best mutual fund for yourself in 2025. 

How Do I Know Which Mutual Fund Category To Invest In?

Selecting the right mutual fund is more than just looking at the returns. There are varying mutual funds, and deciding where to invest can seem complicated. To conclude and pick a fund, you must assess your goals, risk tolerance, and investment horizon.

What Type Of Investor Are You?

While there are multiple investor personalities, they can be categorized into three major categories according to their risk tolerance and investment approach: Aggressive, Moderate, and Conservative investors. Let’s understand the characteristics of each.

Aggressive Investor: An aggressive investor is someone willing to take on more risk for higher returns. These investors also approach investing from a long-term perspective and stay calm during market volatility. A great example of this could be a businessman or working professional investing heavily in high-growth equities.

Here are some mutual fund categories that an investor with the above traits would prefer investing in:

• Equity Mutual Funds – Large-cap, Mid-cap, Small-cap, Multi-cap, and Flexi-cap funds
• Thematic & Sectoral Funds – Investments focused on specific high-growth industries such as technology, healthcare, or infrastructure
• Index Funds & Exchange-Traded Funds (ETFs) – Passive investment options that track equity market indices
• Aggressive Hybrid Funds – A mix of equity and debt with a higher allocation to equities

Moderate Investor: These investors seek a balance between high risk and high returns. They are willing to take on a moderate level of risk to get returns without putting a high risk on their capital. They usually like to diversify their investments to mitigate risk. These investors would prefer investing in the following mutual fund categories: 

• Balanced Hybrid Funds – An equal mix of equity and debt investments
• Multi-Asset Funds - With a mix of allocation towards Equity, Debt and Gold
• Dynamic Asset Allocation Funds – Funds that automatically adjust equity and debt exposure based on market conditions

Conservative Investor: Conservative investors prioritize preserving their capital. They prefer low-risk investments that can generate stable returns. They are also not comfortable with market fluctuations. An example of this category of investor is someone who is saving for retirement or a retired person investing their money for some appreciation. Conservative investors would likely explore funds from the below categories:

• Debt Mutual Funds – Liquid funds, Ultra-Short-Term funds, Short-Term funds, and Corporate Bond funds
• Conservative Hybrid Funds – Primarily debt-focused funds with limited equity exposure
• Fixed Maturity Plans (FMPs) – Market-linked alternatives to fixed deposits with defined maturity periods
• Gilt Funds – Government-backed securities that offer high safety and stability

Know Your Investment Goal

What do you wish to achieve with this investment? Are you saving up for a car, a house or retirement? Answering this will help you determine the right fund category you should invest in.

For example, if you want to save for a house and are okay with staying invested for 8 to 10 years, equity mutual funds like small-cap, mid-cap, or multi-cap funds can be a good option. These funds are often known for their high-risk, high-return characteristics.

Let’s take another example. Say you are a working professional saving for a post-graduate degree. Since equity markets can be volatile in the short term, small-cap or mid-cap funds may not be the best option. Instead, you may want to consider large-cap funds or index funds, which offer relatively stable returns and lower risk. 

If say your goal is building wealth or wealth preservation, debt funds, hybrid funds that balance equity and debt can also help ensure that your capital is protected while still growing over time. If you're looking for passive income, dividend yield funds might be worth exploring.

Determine Your Investment Horizon

Once your goal is clear, the next step is identifying how long you can stay invested. Your investment horizon plays a crucial role in selecting the right mutual fund.

For instance, if you are in your early 30s and saving for your child’s higher education, your investment horizon is at least 8 to 10 years. Since you have a longer timeframe, you can consider equity-focused funds like mid-cap, small-cap, or multi-cap funds that tend to provide higher returns over extended periods.

On the other hand, if you are saving for an international trip within the next 3 to 5 years, your investment horizon is medium-term. You may need moderate growth but cannot afford significant fluctuations. In this case, balanced or dynamic asset allocation hybrid funds would be a more suitable choice.

For short-term goals (less than 3 years) - such as building an emergency fund or saving for a major purchase, debt funds like liquid funds, short-duration funds, or ultra-short-term funds would be ideal as they provide stability and liquidity.

Know Your Risk Appetite

While the above plays a great role in deciding which mutual fund to invest in, your ability to handle market fluctuations is also important in choosing the right mutual fund. Are you comfortable seeing your investments rise and fall frequently, or do you prefer a stable growth pattern? When it comes to risk, you could essentially fall into any of the three categories:

High Risk-Appetite

Say you are in your early 20s, you have just started earning and believe in investing in high-risk investments. You don’t mind short-term volatility because your investment horizon is long. In this case, small-cap, mid-cap, and sector/thematic funds might suit you well. These funds are known for their aggressive growth potential but come with higher risk.

Moderate Risk-Appetite

A person who is willing to take on a little risk, but not lose out on their investment capital would fall in this bracket. For example, someone who is saving for their child’s education would be open to some level of risk but will not want extreme volatility. In this case, a combination of large-cap, mid-cap, and multi-cap funds could work well. These funds offer a mix of stability and growth potential, making them ideal for investors seeking a middle ground.

Low Risk-Appetite

People who fall under the low-risk appetite are ideally those who do not feel comfortable in market volatility. If they believe in preserving their capital and prefer stability over market-linked growth, then equity funds may not be the best fit. Instead, people with a low-risk appetite could explore:

• Debt Mutual Funds
• Fixed Deposits (FDs) & Bonds

While understanding your investment goal, horizon, and risk appetite is essential, these factors don’t work in isolation. Your investment horizon may be long-term, but if you're not comfortable with high volatility, small-cap funds may not be the right fit. Similarly, you might have a high-risk appetite but a short-term goal, making highly volatile funds impractical.

The key is to find the right balance - aligning your goal with the appropriate fund category, ensuring your investment horizon complements the fund’s risk-return potential, and making sure the risk level matches your comfort zone. By applying the right combination of these factors, you can make a well-informed choice and select a mutual fund that truly works for you. 

Now let’s look at how you can pick an equity mutual fund, a debt mutual fund, and an Index fund. Let’s start with equity mutual funds.

How To Check If An Equity Mutual Fund Is Good Or Bad?

Moving to the second phase of finding the ideal equity mutual fund for you, here are the key metrics you need to look at to assess if a mutual fund is good or bad for you:

1. Benchmark Performance

Every mutual fund has a benchmark against which its performance is measured. For example, for a Large-cap mutual fund, the benchmark could be NIFTY 50 TRI, BSE 100 TRI or NIFTY 100 TRI. The benchmark is used to compare the performance of a fund against the broader market. If a mutual fund is beating its benchmark performance it is said that the fund has outperformed. If it is lower than the benchmark performance it highlights underperformance.

2. Expense Ratio

Asset management companies charge a fee to manage a mutual fund. This fee is called the ‘Total Expense Ratio’ or TER. This includes custodian fees, legal and administrative fees, commission fees, advertising charges, etc. They can be anywhere between 0.5 to 2.5%. To understand why the expense ratio is an important metric for this analysis, let’s first understand how they are charged. TER is charged to you on an everyday basis. 

For example, say you invested ₹10,000 at a NAV (Net Asset Value) of ₹5 in mutual fund Y. This means you own 2,000 (10,000/5) mutual fund units of Y. The next day the value of the fund rises by 1%, which means your NAV increases to 5 + 1% = 5.05. Bringing your investment to 2,000 * 5.05 = ₹10,100 (excluding expense ratio).

Assume the fund charges an expense ratio of 1%. Now, TER on your investment would be ₹10,000 + 1% = ₹100. Considering the expense ratio is charged on an everyday basis, it comes to ₹0.27 (100/365). The value of your fund on day 2 after deducting the expense ratio comes to ₹10,099.73 (₹10,100 - ₹0.27). This is how the expense ratio is charged.

Coming back to analysing this metric, it is a given that the lower the expense ratio the better it is and the more it adds to your returns. While we are on this topic, you should also know about ‘commissions’ that are included as a cost in the expense ratio. Commissions are charged on Regular Mutual Funds, this is a fee paid to an intermediary for buying mutual funds on your behalf. Hence, it is better to switch to or invest in direct mutual funds that charge zero commission. You can read about switching from regular to direct mutual funds here. 

3. Beta

The Beta of a mutual fund tells you how volatile the fund is in comparison to its benchmark. So, a Beta of 1 indicates that the fund moves in line with the market. A beta of >1 indicates that the fund is more volatile than the market and <1 tells that the fund is less volatile than the market. 

For example, these are the details of a small-cap mutual fund. The beta of this fund is 0.95, which means the fund is less volatile than its benchmark. So, if say its benchmark was to tank by 1%, the fund would drop by 0.95%.

Source: Rupee Vest
 

4. Alpha

The next important step is to look at the Alpha of a mutual fund. Alpha is basically the ‘excessive’ return a fund generates with respect to its benchmark. So, say a mutual fund generated a return of 14% and its benchmark index generated 11%. The Alpha, in this case, is the difference between the two (14-11), which is 3%. 

Alpha can be defined as the ‘excessive return’ a fund generates over its benchmark. However, this does not account for the risk taken by the fund to generate that return. Basically, the true value of Alpha comes on a risk-adjusted basis. Let’s understand in detail.

When coming to Alpha’s value we also need to consider a risk-free return investment option, meaning an investment that could give you returns without taking on any risk. This is important because investors can always invest in a risk-free asset if the mutual fund were to generate the same return as them. 

Risk-free assets for this purpose can be considered a Treasury Bill which is backed by the government and unlikely to default. Now, Alpha is calculated as follows: 

Alpha = (Mutual fund return - Risk-free return) - (Benchmark return - Risk-free returns)*beta

So say, for example, the return from a 91-day T-bill issued by the government is 5%. This means you will receive a 5% return at zero risk if you invest in this T-bill. Mutual fund return is 12%. Benchmark is 10% and Beta is 1.2.

The Alpha would be:

(12%−5%)−[(10%−5%)×1.2] = 1%

The 1% denotes that the fund has outperformed its benchmark by 1% on a risk-adjusted basis.

Of course, you will find the Alpha already calculated from a funds fact sheet. This is only for your understanding of the metric.

5. Standard Deviation

Standard Deviation measures the volatility of mutual funds from their average returns. So in simple terms, a high standard deviation indicates that a mutual fund is very volatile and a low standard deviation indicates that the fund is less volatile. 

Let’s compare two small-cap mutual funds to understand this.

In the above example, the Standard Deviation of Fund 1 is 13.34% while that of Fund 2 is 18.51%, indicating Fund 2 is more volatile than Fund 1.

While the above definition is enough to analyse a mutual fund by this metric, let’s go one step further to understand how Standard Deviation is a measure of volatility.

Standard Deviation tells you how much the returns of a mutual fund fluctuate from the average return of the fund. Basically, say you invest in a fund that generated 15% in a month. 

Now, to figure out whether the mutual fund will generate a consistent return of 15% every month or fluctuate we need ‘Standard Deviation’. Say the standard deviation of this fund is 10%. So, now we know that the fund's return can fluctuate by +10% or -10% every month.

6. Sharpe Ratio

Sharpe Ratio is another interesting metric for equity mutual funds. It tells you how much excess return you are generating for the amount of risk you are taking. 

For example, if the Sharpe Ratio of a mutual fund is 0.85 it tells you that for every 1% of risk that the mutual fund is taking it is generating 0.85% of excess return.

Now, why is the Sharpe Ratio important? Imagine you have two equity mutual funds:

• Fund A returns 16% per year.
• Fund B returns 18% per year.

At first glance, Fund B might seem more attractive because of its higher return. However, returns alone don't tell the whole story. You also need to consider the risk taken to achieve that return. This is where the Sharpe Ratio comes into play.

In summary, the Sharpe Ratio is a crucial metric because it provides a clearer picture of an investment's performance by balancing return with risk. It helps ensure that when you choose a mutual fund, you're not just chasing high returns but also considering how volatile those returns are relative to the risk you're taking.

7. Sortino Ratio

The Sortino Ratio is a variation of the Sharpe Ratio. It gives you a measure of the additional return a mutual fund generates by considering the downside risk. It gives investors a view of how the risk-adjusted performance would look if only the ‘loss’ aspect of volatility was considered.

So say the Sortino Ratio of a mutual fund is 1.25. It tells you that for every 1% of the downside risk the fund takes, it generates 1.25% of excess returns. Sortino Ratio gives you a clear picture of how your investment would perform when it matters the most - in times of negative volatility.

8. Capture Ratio

Capture Ratio is a metric that tells you how a mutual fund is performing in comparison to its benchmark in different market conditions. Basically, the capture ratio records the performance of a fund in an upside and downside market.

So, say a mutual fund has an upside capture ratio of 95. This would mean that the fund managed to capture 95% of the performance when its benchmark was moving up. 

Similarly, say a mutual fund has a downside capture ratio of 34. So, this would mean that the fund captured 34% of the downside returns of the benchmark.

In simple terms, we would like the upside capture ratio of a mutual fund to be as high as possible. At the same time, the downside capture ratio should be as low as possible.

9. CAGR

CAGR is the compounded annual growth rate. This metric calculates the annual growth rate of an investment after considering compounding. 

So, to analyse a mutual fund you could take the 3-year, 5-year and 10-year CAGR of different mutual funds to compare the returns it has generated over a period of time.

The metrics that we covered above are something that is easily available in any funds fact sheet or on the INDmoney app.

How To Pick A Debt Mutual Fund?

If you know how debt mutual funds work, you would also understand they do not stray from risks. While these funds are considered to be safer than equity funds, they are still prey to interest rate risk, credit risk, and default risk. Before we get into the metrics let’s take a moment to understand these risks, since they are the base of debt mutual fund analysis.

When the Government or corporations need funds they raise it by issuing bonds, treasury bills, commercial papers, etc. Debt mutual funds invest in these securities with the pooled money of investors. Now, say a corporation that has issued a commercial paper in exchange for money, goes bankrupt. They declare insolvency and refuse to repay the amount. This results in credit risk or default risk.

Debt mutual funds are also subject to interest rate risk. In simple terms, interest rates and bond prices have an inverse relationship. When interest rates fall, bond prices rise. Hence, the NAV of a debt mutual fund rises. At the same time, if interest rates rise, bond prices fall - this happens because bonds with better interest rates float in the market, making present bonds less attractive. In both scenarios, long-term debt mutual funds would be impacted the most

When analyzing a debt mutual fund here are the things you should consider:

Average Maturity

When deciding which debt fund to invest in, consider the ‘average maturity’ of a fund. This tells you how long on average it takes for the bonds in a debt fund to mature. Say the average maturity of a fund is 4 years. It tells you that the bonds in the fund will take 4 years to mature, but what it also tells you is that the fund is susceptible to interest rate risk and default risk. The longer the duration of a fund the more it is exposed to risks. If you invest in a long-term debt mutual fund, you should ideally hold it for its average maturity duration.  

Portfolio Allocation

Like how in equity mutual funds the allocation is spread across small-cap, large-cap, and mid-cap stocks. In the case of debt funds, the portfolio is spread across treasury bills, corporate bonds, commercial paper etc. The idea here is to see how the portfolio of the fund is diversified. Let’s take an example: These are the holdings of a debt fund.

The above example shows the fund has a maximum investment in government securities. Government securities are considered risk-free since they are backed by the government. This means these funds have minimum default risk, but they are still exposed to interest rate risk. The inclusion of corporate securities exposes the fund to default and interest rate risk. However, a lower percentage also indicates the fund is trying to avoid corporate credit risk.

However, corporate bonds often have shorter maturities than long-term government securities, making them less sensitive to interest rate changes The key is to assess how the fund balances risk, returns, and interest rate sensitivity. If you prefer stability, a fund with higher government security allocation might be a good fit. If you seek better yields, a mix of corporate debt and government security can provide a balance.

Credit Quality

Banks, corporations, and governments issue bonds, and these bonds are assigned a credit rating—a measure of the issuer’s creditworthiness. Credit rating agencies like CRISIL, ICRA, etc., assess and assign these ratings, which range from AAA to CCC.

• AAA-rated bonds indicate high credit quality with a low risk of default.
• CCC-rated bonds carry a higher default risk but offer higher yields to compensate investors.

When evaluating a debt mutual fund, check the allocation of AAA, AA, A, and BBB-rated bonds:

• A higher proportion of AAA-rated bonds means greater safety and lower default risk.
• More BBB-rated bonds indicate higher yields but increased risk.

A well-diversified fund should primarily hold investment-grade securities (AAA, AA, A) to maintain a balance between risk and returns.

Yield To Maturity

The next metric you need to look at is the Yield To Maturity. This metric tells you how the expected yield (return) an investor can generate if they hold the fund till maturity. YTM is often compared to its category average. Let’s understand this with an example, say the YTM of a fund is 8% and that of its category average is 6%: What does this tell you? It tells you three things:

1. The debt fund will generate an 8% return if held till maturity.

2. This fund is taking on more credit risk to achieve the extra 2% than its category average.

3. The fund could have longer-duration bonds to reach a higher yield.

Let’s understand the second and third points. Bonds have credit ratings. If a bond has AAA as its rating it will likely offer less yield than a bond with say BBB as its rating as investors demand higher returns for the additional risk of default. Similarly, long-term bonds generally offer higher YTMs than short-term bonds to compensate for the risk of holding them longer but have interest rates risk.

The conclusion is that you should see if a higher YTM is due to low-rated bonds, and check the credit quality to avoid high default risk. If a higher YTM is due to longer durations, be aware that rising interest rates can lower fund returns.

How To Choose An Index Fund? The Right Metrics To Look At

An index fund is a mutual fund that replicates a market index. The main objective of funds in this category is to mirror its benchmark performance. Now, there are multiple index funds tracking the same index, the question arises: what makes one fund different from the other and how is the fund performing better than the other?

This happens due to ‘tracking error’ which is exactly what you need to look at when deciding which index mutual fund to choose. Tracking error is easily available on a funds fact sheet. Tracking error is the difference between the fund’s returns and the returns of the index it tracks. Ideally, a good index fund should have minimal tracking error, meaning it closely mirrors the index without significant deviations.

Tracking error occurs due to factors like expense ratio, cash holdings, rebalancing frequency, and corporate actions. A lower tracking error indicates the fund is efficiently replicating the index, while a higher tracking error suggests inefficiencies in fund management. 

So, when comparing multiple index funds tracking the same index, opt for the one with the lowest tracking error, this ensures your returns stay as close to the benchmark as possible. Once you have sorted funds based on their tracking error, you can further look at the AUM and expense ratio to decide which one to pick.

How Do I Compare Mutual Funds And Pick The Right One?

We’ve covered all the key metrics you need to analyse when selecting a mutual fund. If everything is clear so far, it’s time to compare different funds to find the best fit for you.

Before you begin your comparison, keep these points in mind:

• Always compare funds within the same category. For example, comparing a small-cap fund with a large-cap fund won’t lead to an accurate conclusion since their risk profiles differ.
• Beyond the metrics discussed, consider the fund manager’s track record -assessing their expertise and history in managing and growing funds is crucial.

There are multiple ways to compare funds and draw conclusions, but a straightforward approach is to assign points based on your analysis. Let’s break it down:

Let’s consider an equity mutual fund for this example: Say you’re an aggressive investor and decide to invest in a small-cap mutual fund. You pick two small-cap funds and compare their performance using INDmoney’s mutual fund comparison tool.

For this example, let’s take equity mutual funds and consider the key metrics of two small-cap mutual funds in the table below:

Now, based on these metrics, you can assign points to the better-performing fund. Every time a fund meets a favourable metric, it earns +1 point; if it falls short, it gets -1. At the end of this exercise, you’ll have a clear rating for each fund, helping you decide which one to invest in.

Looking at the table above, Fund A scores 5 points, while Fund B scores just 1 - making Fund A the better choice in this case. You can follow this method to compare and select the right mutual fund for you.

Frequently Asked Questions (FAQ)