Here are four steps to choosing a mutual fundHere is a simple four-step guide to selecting a mutual fund for your needs

With 36 SEBI fund categories and about 2000 mutual fund schemes, the task of picking a mutual fund is not easy. In this article, we try to simplify it for you.

  1. Identify your goal

‘What are you investing for’ should be the starting point of the fund selection process. You may be saving for a foreign holiday, a home purchase or something as long-term as retirement. The first could be 6-12 months away, the second might be 3-5 years away and the last might be 2-3 decades down the line. Different types of funds will suit the time-period of these different goals.

  1. Identify your risk appetite

Virtually every mutual fund is subject to one or the other type of risk. However, some mutual funds carry higher levels of risk than others. A liquid debt fund will carry less risk than a large-cap equity fund which will, in turn, be less volatile than a small cap equity fund. You have to understand your own psychological and financial ability to withstand risk.

  1. Identify your fund category

The answer to this question springs directly from the answers you give to points 1 and 2. Here is a table that will help you navigate this process:

Time Horizon High-Risk Appetite Medium Risk Appetite Low-Risk Appetite
Less than 1-year Low duration funds Low duration funds Liquid funds
1 – 3 years Credit Risk funds Short duration funds Low duration funds
3 – 5 years Aggressive Hybrid funds Credit Risk funds Short duration funds
Above 5 years Multicap funds Large Cap Funds Aggressive Hybrid funds

We have not slotted all 36 categories into the table because this is not feasible. There are several mutual fund categories that suit some people but not others. For instance, overnight funds are geared towards corporate treasuries, sector funds are suited for people with a high level of confidence and interest in a particular sector. International funds may suit you if you have goals or expenditures such as foreign travel or education. However, this would not apply to someone with purely rupee-based expenditures.

Identify your fund

Once you’ve identified your fund category you can use parameters like returns, returns in bear markets, fund manager history and ratings to shortlist a particular fund or a couple of funds. We give you our top picks in a few common categories below. Returns and performance keep changing and we encourage you to do your own research to supplement our picks.

Category Fund
Liquid Aditya Birla Sun Life Liquid Fund, Invesco India Liquid Fund
Low duration Kotak Low Duration Fund, DHFL Pramerica Low Duration Fund
Short duration Franklin India Short Term Income Plan, DHFL Pramerica Short Maturity Fund
Credit Risk Aditya Birla Sun Life Credit Risk Fund, Franklin India Credit Risk Fund
Aggressive Hybrid L&T Hybrid Equity Fund, ICICI Prudential Equity and Debt Fund
Large Cap ICICI Prudential Bluechip Fund, Aditya Birla Sun Life Frontline Equity Fund
Multicap Mirae Asset India Equity Fund, Kotak Standard Multicap

The funds chosen for the table are as per the new SEBI categories. Some of these funds may have been classified differently by Value Research/Morningstar which classified funds according to proprietary systems. However, the categories we have taken are those accepted by the funds themselves under the new SEBI system.

What about mid and small-cap funds?

As mentioned above, we have not considered all categories. At RupeeIQ, we believe that the ability of multi-cap funds to move into mid and small cap companies when required and out of them, makes them a more compelling proposition than dedicated mid and small-cap funds. If however, you have a strong conviction that mid and small cap funds present an attractive investment case, you can consider these categories. We may come out with a list of our top picks in these categories at a later date.

Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at