Step-by-Step Guide to Selecting a Mutual Fund

Warren Buffet, in a letter to his shareholders said, ‘do not ask a barber if you need a haircut’. This applies to many situations in life. In the present context, ‘never ask someone in the financial advisory business, if mutual fund selection is hard’.

Selecting a mutual fund is not rocket science. It can be done by anyone. Of course it requires a bit of effort, nothing unnatural about that. Anything in life that is worth doing requires effort.

A while back I posted a pdf file which containuneven stepsed step-by-step instructions to choose a mutual fund. It was well received by many readers. Now that the blog has a much higher readership I would like to re-post the calculator, in the hope that it can be made better with more feedback.

Objectives behind this guide:

  • Create a resource which is simple to understand and easy to use.
  • With a bit of practice, a user should be able to shortlist good mutual funds within 15-20 minutes. It makes no difference if someone takes an hour or a few days. The point is to illustrate how easy fund selection is once you have the right perspective.
  • Mutual funds can be analyzed in many, many ways. The guide should at least use many of important analysis methods.
  • It should first explain in a simple way what the results from the analysis signify.
  • The fund selection must be completely objective. That is it should depend only the results of the analysis. It should take into account long time performance and should not go by fund ratings.

Notes:

  • The guide deals with equity mutual funds. Debt mutual funds are a different ball game. I have mentioned several times in the blog regarding debt mutual fund selection. Shall put them together soon.
  • Before investing in equity, it is important to understand the nature of stock market returns.
  • The guide is based on the resources available at Value Research Online. Other resources like Money Control and Morning Star can also be used.
  • I have not included the evaluation of the fund with respect to its benchmark. I think the analysis methods used in the guide account for this indirectly.
  • Graphical evaluation of long term performance with respect to fund-benchmark like Money Control does is indeed useful. I am working on a guide to evaluate funds we hold. I will incorporate the above feature there.
  • I have personally used this method to choose the funds that I hold.
  • The idea is not to choose ONE fund. The idea is to short-list a few good funds. I am convinced that choosing any fund from the short-list will work for the long-term investor.
  • Evaluating the fund manager or management team, looking at the stability of the fund house, the style of the manager, how often he/she churns the portfolio, the kind of stocks he/she holds are not considered.
  • Such factors are important. However, the long-term performance of a fund should reflect these factors.
  • My primary aim is to show investors how to choose a large-cap fund quickly but objectively. I am convinced the method will work with any type of fund.
  • I make no claim that this is the best such guide or that it is even useful. This is written by a student of personal finance.

Feed back:

  • How can we make this better?
  • What do you think is missing from the point of view of a beginner?
  • What is missing from the point of view of a more advanced user?
  • If you think this is not useful, please let me know specifically what you think is wrong or should be changed.

Update:

June 2015

Part 1: How to select an equity mutual fund -preamble

Part 2: How to select an equity mutual fund – Creating a shortlist

Part 3: How to select an equity mutual fund – Making a Choice!

Now you can use the Automated Mutual Fund Screener to create the shortlist!

Download the combined PDF version of the updated mutual fund selection guide

Dec. 2012

Download the Step-By-Step Guide to Selecting a Mutual Fund

 

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189 thoughts on “Step-by-Step Guide to Selecting a Mutual Fund

  1. pattu sir the guide is excellent …..but i want you to throw some more light on alpha,beta,r-squared and std deviation part……….what i mean is….. are there any standard ranges to be followed…..or they will vary according to funds selected…for eg beta “1” is for the market…….so what will we define as “market” in this case………i am only asking for the large cap funds…..becoz i have only studied that part……

    1. There are no standard ranges. Once must be aware of the extreme values of the measures and choose something which one is comfortable with. Of course these will change with time.

      the index is the benchmark index. for large cap funds this is easy because it will either be Sensex or Nifty. Multi-cap funds have more than one benchmark. I don’t know exactly how it is calculated in this case and can only guess. However,the range of the parameters are the same.

  2. pattu sir the guide is excellent …..but i want you to throw some more light on alpha,beta,r-squared and std deviation part……….what i mean is….. are there any standard ranges to be followed…..or they will vary according to funds selected…for eg beta “1” is for the market…….so what will we define as “market” in this case………i am only asking for the large cap funds…..becoz i have only studied that part……

    1. There are no standard ranges. Once must be aware of the extreme values of the measures and choose something which one is comfortable with. Of course these will change with time.

      the index is the benchmark index. for large cap funds this is easy because it will either be Sensex or Nifty. Multi-cap funds have more than one benchmark. I don’t know exactly how it is calculated in this case and can only guess. However,the range of the parameters are the same.

  3. pattu sir step one is to choose the funds………….how to keep reviewing them…….should it be done yearly…..?

    1. monitor closely. At least twice a year. Every fund will have a bad patch. A fund with good history can be given around 2-3 years to recover. So you need to choose well and be patient, but keep a close eye.

  4. pattu sir step one is to choose the funds………….how to keep reviewing them…….should it be done yearly…..?

    1. monitor closely. At least twice a year. Every fund will have a bad patch. A fund with good history can be given around 2-3 years to recover. So you need to choose well and be patient, but keep a close eye.

    1. Yes it is. What I don’t like about fund rankings is the duration. Crisil uses 3Y. VR online 3 and 5Y average etc. That is too small a time for equity instruments.

      Also ranking is relative. I am only interested in the funds cagr relative to what I need for my goal. As long as the fund has a decent history and returns are not too abysmal, I will not change funds. In fact, I never have.

    1. Yes it is. What I don’t like about fund rankings is the duration. Crisil uses 3Y. VR online 3 and 5Y average etc. That is too small a time for equity instruments.

      Also ranking is relative. I am only interested in the funds cagr relative to what I need for my goal. As long as the fund has a decent history and returns are not too abysmal, I will not change funds. In fact, I never have.

  5. Thank you very much for your great articles,Your hard work is appreciated……….

    what is your openion about HDFC top 200 fund
    I article 2 you have suggested ICICI pru. focused blue chip and FI Blue chip.
    however in article 3 you have suggested HDFC top 200.
    I am confused as i have invested lumsum in HDFC top 200 two yers back and now i want to start SIP of 10000, which one i should choose, Shpuld i continue with top 200 or should open new SIP with FI Bluechip.
    Kindly Advise.

    1. Hi Pankaj,

      Thank you very much. For your investments, assuming you don’t need the money for seven years or more(preferably more!)I would suggest that you leave the investment in Top 200 as is. You consider ICICI Blue Chip and one small and mid-cap fund like IDFC Premier equity or a multi-cap fund like PPFAS Long term value fund.

      FI Blue Chip instead of ICIC Foc. blue chip should also be fine.

  6. Thank you very much for your great articles,Your hard work is appreciated……….

    what is your openion about HDFC top 200 fund
    I article 2 you have suggested ICICI pru. focused blue chip and FI Blue chip.
    however in article 3 you have suggested HDFC top 200.
    I am confused as i have invested lumsum in HDFC top 200 two yers back and now i want to start SIP of 10000, which one i should choose, Shpuld i continue with top 200 or should open new SIP with FI Bluechip.
    Kindly Advise.

    1. Hi Pankaj,

      Thank you very much. For your investments, assuming you don’t need the money for seven years or more(preferably more!)I would suggest that you leave the investment in Top 200 as is. You consider ICICI Blue Chip and one small and mid-cap fund like IDFC Premier equity or a multi-cap fund like PPFAS Long term value fund.

      FI Blue Chip instead of ICIC Foc. blue chip should also be fine.

  7. Dear Pattu,
    Yes I already read your articles and it really helped me , thanks
    My goal is 10-15yr , not more than 15yr, please advice

    1. Thank you. For a 10+ year goal, you can use
      Franklin blue Chip Equity + Quantum Long term Equity
      or
      FIBCF + ICICI Pru Discovery.
      Or you can even opt for a single fund: HDFC Balanced.

      All of them are equally good combinations.

  8. Dear Pattu,
    Yes I already read your articles and it really helped me , thanks
    My goal is 10-15yr , not more than 15yr, please advice

    1. Thank you. For a 10+ year goal, you can use
      Franklin blue Chip Equity + Quantum Long term Equity
      or
      FIBCF + ICICI Pru Discovery.
      Or you can even opt for a single fund: HDFC Balanced.

      All of them are equally good combinations.

  9. Thank you
    When I analyzed as per your calculation from valuresearch.com I found
    ICICI Pru Focused BlueChip is better than FI Blue chip, pleae provide your idea

    1. ICICI bluechip is a newer fund but has performed well. Soon because of increase in size its performance may decrease. While it is certainly a good buy, one should monitor is more. Franklin bluechip is 20 yr old fund and is a consistent performer.

      You can go with the ICICI fund but do keep a close watch on performance. Not saying you should immediately exit if there is a drop but just keep any eye.

  10. Thank you
    When I analyzed as per your calculation from valuresearch.com I found
    ICICI Pru Focused BlueChip is better than FI Blue chip, pleae provide your idea

    1. ICICI bluechip is a newer fund but has performed well. Soon because of increase in size its performance may decrease. While it is certainly a good buy, one should monitor is more. Franklin bluechip is 20 yr old fund and is a consistent performer.

      You can go with the ICICI fund but do keep a close watch on performance. Not saying you should immediately exit if there is a drop but just keep any eye.

  11. Thank you sir, I analyzed as per mentioned value here and FI Blue chip have very low alpha.
    This reason I didnt consider FIBC.
    ICICI PRUDENTIAL FOCUSED BLUECHIP – Alpha -4.24, beta – 0.93, risk – Below Avg, star – 5
    FI Blue chip – Alpha -0.04, beta – 0.86, risk -below avg Below Avg, star – 3
    ICICi pru top 100 – Alpha -4.87, beta – 0.93, risk – Below Avg, star – 5
    I already have below funds and planing 1 Large Cap and Large & Mid Cap .

    Existing funds, here i think hdfc top 200 and equity is not good so need better LC and LMC
    EQUITY / SBI Emerging Businesses Fund – Regular Plan – Growth
    EQUITY / SBI Blue Chip Fund – Regular Plan – Growth
    HDFC Top 200 Fund (G)
    HDFC MidCap Opportunities (G)
    HDFC Equity Fund (G)

    Please note my final decision is as per your suggestion.

    1. Fine Jayan. You can go with ICICI Blue chip. Just keep in mind that it is a new fund. That is all.

  12. Thank you sir, I analyzed as per mentioned value here and FI Blue chip have very low alpha.
    This reason I didnt consider FIBC.
    ICICI PRUDENTIAL FOCUSED BLUECHIP – Alpha -4.24, beta – 0.93, risk – Below Avg, star – 5
    FI Blue chip – Alpha -0.04, beta – 0.86, risk -below avg Below Avg, star – 3
    ICICi pru top 100 – Alpha -4.87, beta – 0.93, risk – Below Avg, star – 5
    I already have below funds and planing 1 Large Cap and Large & Mid Cap .

    Existing funds, here i think hdfc top 200 and equity is not good so need better LC and LMC
    EQUITY / SBI Emerging Businesses Fund – Regular Plan – Growth
    EQUITY / SBI Blue Chip Fund – Regular Plan – Growth
    HDFC Top 200 Fund (G)
    HDFC MidCap Opportunities (G)
    HDFC Equity Fund (G)

    Please note my final decision is as per your suggestion.

    1. Fine Jayan. You can go with ICICI Blue chip. Just keep in mind that it is a new fund. That is all.

  13. Dear Puttu, please find 4 funds details and suggest.
    Risk Beta Alpha R Sq Expense ratio
    Franklin India Bluechip Below Avg. 0.86 0.04 0.96 2.16
    ICICI Prudential Top 100 Below Avg. 0.93 4.87 0.93 2.67
    ICICI Pru Focused BlueChip Low 0.88 4.24 0.97 1.2
    Hdfc balanced Below Avg. 0.87 4.79 0.8 1.81

    Please note my final decision is as per your suggestion.

    1. Fine Jayan. You can go with ICICI Blue chip. Just keep in mind that it is a new fund. That is all.

  14. Dear Puttu, please find 4 funds details and suggest.
    Risk Beta Alpha R Sq Expense ratio
    Franklin India Bluechip Below Avg. 0.86 0.04 0.96 2.16
    ICICI Prudential Top 100 Below Avg. 0.93 4.87 0.93 2.67
    ICICI Pru Focused BlueChip Low 0.88 4.24 0.97 1.2
    Hdfc balanced Below Avg. 0.87 4.79 0.8 1.81

    Please note my final decision is as per your suggestion.

    1. Fine Jayan. You can go with ICICI Blue chip. Just keep in mind that it is a new fund. That is all.

  15. Thanks Puttu,
    Can go with FI Blue chip+ICICi blue chip
    If you see any issue in new funds then I will go with FIBC

  16. Thanks Puttu,
    Can go with FI Blue chip+ICICi blue chip
    If you see any issue in new funds then I will go with FIBC

  17. I see any difference in the value btwn the below, which one i need to select
    ICICI Prudential Focused Bluechip Equity Inst I – risk low, expse ratio -1.20
    ICICI Prudential Focused Bluechip Equity Reg – risk below avg, expse ratio 2.3
    ICICI Prudential Focused Bluechip Equity Direct

  18. I see any difference in the value btwn the below, which one i need to select
    ICICI Prudential Focused Bluechip Equity Inst I – risk low, expse ratio -1.20
    ICICI Prudential Focused Bluechip Equity Reg – risk below avg, expse ratio 2.3
    ICICI Prudential Focused Bluechip Equity Direct

  19. Dear Pattu, I read institutional have been stopped and now only reg. so in this case FIBC better I think. But worry on FIBC’s alpha value.pls suggest
    Also do I need to restructure my existing portfolio

  20. Dear Pattu, I read institutional have been stopped and now only reg. so in this case FIBC better I think. But worry on FIBC’s alpha value.pls suggest
    Also do I need to restructure my existing portfolio

  21. Dear Pattu, Thanks
    I was going through your advice on the below link of restructuring funds.
    My currect allocation started last month (feb 13)
    EQUITY / SBI Emerging Businesses Fund – Regular Plan – Growth -1000
    EQUITY / SBI Blue Chip Fund – Regular Plan – Growth -1000
    HDFC Top 200 Fund (G) -2000
    HDFC MidCap Opportunities (G) -1000
    HDFC Equity Fund (G) -1000

    Planning new Allocation -15000pm
    ICICI Pru Focused BlueChip Eq Fund or ,Franklin India Bluechip -5000
    Quantum Long-Term Equity Fund – 3000
    HDFC top 200 -2000
    sbi blue chip – 1000
    HDFC Equity – 1000
    ICICI Pru Discovery Fund (G) -1000
    SBI emerging -1000
    remove – HDFC MidCap Opportunities (G) -1000

    Kindly advice in restructuring

    http://www.jagoinvestor.com/forum/my-mf-portfolio-and-your-feedback-needed

    1. You will need to make a more informed decision on this. I will send you the link to my MF tracker. Enter all transactions in it and check the performance yourself. You can then decide which to throw out and which to keep.

  22. Dear Pattu, Thanks
    I was going through your advice on the below link of restructuring funds.
    My currect allocation started last month (feb 13)
    EQUITY / SBI Emerging Businesses Fund – Regular Plan – Growth -1000
    EQUITY / SBI Blue Chip Fund – Regular Plan – Growth -1000
    HDFC Top 200 Fund (G) -2000
    HDFC MidCap Opportunities (G) -1000
    HDFC Equity Fund (G) -1000

    Planning new Allocation -15000pm
    ICICI Pru Focused BlueChip Eq Fund or ,Franklin India Bluechip -5000
    Quantum Long-Term Equity Fund – 3000
    HDFC top 200 -2000
    sbi blue chip – 1000
    HDFC Equity – 1000
    ICICI Pru Discovery Fund (G) -1000
    SBI emerging -1000
    remove – HDFC MidCap Opportunities (G) -1000

    Kindly advice in restructuring

    http://www.jagoinvestor.com/forum/my-mf-portfolio-and-your-feedback-needed

    1. You will need to make a more informed decision on this. I will send you the link to my MF tracker. Enter all transactions in it and check the performance yourself. You can then decide which to throw out and which to keep.

      1. Dear SIr,

        I find ur blog very much useful. I am an NRI and planning to come back to India with lumpsum. Any plan to give some advice. Also, I will be grateful if you give me link for the MF Tracker.

        Thanks

        1. No I dont do financial advisory. If you scroll up the blog you will see links to both the MF tracker and list of fee-only financial planners. You can consult one of them.

  23. Hi Pattu,

    I have a naive question regarding the documented returns of the MFs – are they pre-expenses returns or post-expenses returns? For example, all the returns given on sites like VRO, MS, etc. – are the returns given after deducting the fund houses’ expenses?

    Please clarify 🙂

    Thanks in advance,
    Ashok

    1. Hi Ashok, the NAV declared and therefore the returns are post-expenses. This is independent of who reports it.

      1. Great, the returns look much more enticing now 🙂

        Thanks for the prompt response Pattu.

  24. Hi Pattu,

    I have a naive question regarding the documented returns of the MFs – are they pre-expenses returns or post-expenses returns? For example, all the returns given on sites like VRO, MS, etc. – are the returns given after deducting the fund houses’ expenses?

    Please clarify 🙂

    Thanks in advance,
    Ashok

    1. Hi Ashok, the NAV declared and therefore the returns are post-expenses. This is independent of who reports it.

      1. Great, the returns look much more enticing now 🙂

        Thanks for the prompt response Pattu.

  25. Dear Mr Pattu,
    I have read your complete guide this one and also read your earlier review article on HDFC T200. Excellent simplest way of explaination. I am mentioning my queries with my requirement here under. if you can please spare little time, your response will be highly valuable to me.
    I am investing since last 2 yr as an SIP. my investment are as under and my requirement is after 10 Yr Minimum ( Child education / Retirement).
    QLTEF- 25000- WEEKLY
    FIBCF- 5000- MONTHLY
    HDFC T200- 5000 – MONTHLY
    IDFC PREMIER EQU- 3000- MONTHLY

    from your guide , i am confused now to as i have multicap , large and mid cap, large cap and mid cap all seperate fund i have inmy pf.

    My requirement is child education after 15 yr 1 crore and retirement after 20 Yr 2 crore .

    i have 5 lac as fd with 9 % rate which i am not going to touch for long period.

    Can you plese suggest about my fund selection?

    Thanks bro

    nJOy

      1. Excellent tool.
        But create confusion as it shows 40 % overlapping within my all three funds. What will be the recommendations if found so.

        1. I expected it to be so. Assign FIBCF and QLTE in one folio and HDFC Top 200 and IDFC in another say, retirement. Please be mindful of this overlap when you make future purchases

          1. Dear Pattu,

            Thank you very much for your great articles. The steps are very useful in deciding few good funds from so much of funds.
            Sir, I want your suggestion – Is name of Fund Manager also a factor for selecting MF?
            Sankran Naren, Anand Radhakrishnan, Kenneth Andred, Anoop Shah, Prashant Jain, Chirag setlewad and Anoop Bhaskar are some great managers and their funds are always on top.
            Please comment.

            AMOL

          2. Dear Pattu,
            As u have pointed out correctly, I am planning to go with 10000 more and looking for advice on go with new fund or distribute with the already holding fund.considering minimising the overlapping
            I wana invest for my second child for higher education.

  26. Dear Mr Pattu,
    I have read your complete guide this one and also read your earlier review article on HDFC T200. Excellent simplest way of explaination. I am mentioning my queries with my requirement here under. if you can please spare little time, your response will be highly valuable to me.
    I am investing since last 2 yr as an SIP. my investment are as under and my requirement is after 10 Yr Minimum ( Child education / Retirement).
    QLTEF- 25000- WEEKLY
    FIBCF- 5000- MONTHLY
    HDFC T200- 5000 – MONTHLY
    IDFC PREMIER EQU- 3000- MONTHLY

    from your guide , i am confused now to as i have multicap , large and mid cap, large cap and mid cap all seperate fund i have inmy pf.

    My requirement is child education after 15 yr 1 crore and retirement after 20 Yr 2 crore .

    i have 5 lac as fd with 9 % rate which i am not going to touch for long period.

    Can you plese suggest about my fund selection?

    Thanks bro

    nJOy

      1. Excellent tool.
        But create confusion as it shows 40 % overlapping within my all three funds. What will be the recommendations if found so.

        1. I expected it to be so. Assign FIBCF and QLTE in one folio and HDFC Top 200 and IDFC in another say, retirement. Please be mindful of this overlap when you make future purchases

          1. Dear Pattu,

            Thank you very much for your great articles. The steps are very useful in deciding few good funds from so much of funds.
            Sir, I want your suggestion – Is name of Fund Manager also a factor for selecting MF?
            Sankran Naren, Anand Radhakrishnan, Kenneth Andred, Anoop Shah, Prashant Jain, Chirag setlewad and Anoop Bhaskar are some great managers and their funds are always on top.
            Please comment.

            AMOL

          2. Dear Pattu,
            As u have pointed out correctly, I am planning to go with 10000 more and looking for advice on go with new fund or distribute with the already holding fund.considering minimising the overlapping
            I wana invest for my second child for higher education.

  27. Dear Pattu,
    Nice article again. Very useful for selecting 4-5 funds out of 1000 funds.
    Sir I have a query- Is Name of Fund Manager is also for selecting MF?
    Naren Sankaran, Anoop Bhaskar, Anand Radhakrishnan, Prashant Jain, Kenneth Andrade, Chirag setlewad, Anoop Shah are the people whose funds are always the best.
    awaiting your reply.

    AMOL

  28. Dear Pattu,
    Nice article again. Very useful for selecting 4-5 funds out of 1000 funds.
    Sir I have a query- Is Name of Fund Manager is also for selecting MF?
    Naren Sankaran, Anoop Bhaskar, Anand Radhakrishnan, Prashant Jain, Kenneth Andrade, Chirag setlewad, Anoop Shah are the people whose funds are always the best.
    awaiting your reply.

    AMOL