Most new and young investors enter the mutual fund market through internet platforms or bank recommendations, often without seeking expert advice. While this approach may seem convenient, it overlooks a critical aspect — not all mutual funds carry the same level of risk or suit every investor’s financial goal. Choosing funds without aligning them with your risk profile, time horizon, and objectives can lead to disappointment later.
CA Nitin Kaushik, in a recent post on X, explained that when choosing a mutual fund, investors often make the mistake of chasing past returns — but that’s only part of the story. A smarter approach, he said, is to focus on the fund’s quality, consistency, and costs.
Start with fund age — a scheme that’s been around for at least 7–10 years has proven its performance across multiple market cycles. Next, check the fund manager’s experience; a steady 7–8 year track record signals skill and stability. Always compare the fund’s returns to its benchmark index — consistent outperformance means the fund is adding real value, not merely tracking market trends.
The expense ratio is another crucial factor. It’s the annual fee charged by the fund house to manage your money. A lower expense ratio means more of your returns stay in your pocket. Over time, even a small 1% difference in expenses can create a massive impact — for example, saving that 1% could add up to Rs 8–10 lakh more over 20 years on a Rs 10,000 monthly SIP, assuming a 12% CAGR.
“Most people chase past returns. That’s a big mistake. Instead, they should check — Fund age, Fund manager, benchmark comparison and others. Even a 1% lower expense ratio can add Rs 8–10 lakh extra over 20 years on a Rs 10,000 SIP (12% CAGR). Small numbers compound big,” Kaushik said.
Finally, Kaushik advises investors to choose a trusted AMC (fund house) and check the exit load — the fee charged if you redeem your investment early — to avoid hidden costs. In his words, “Smart selection today ensures strong, steady compounding tomorrow.”
Choosing the right fund
When selecting a mutual fund, start by identifying your financial goals and investment horizon. For long-term goals like retirement or children’s education, equity funds offer higher growth potential. For short-term goals (1–3 years), debt funds provide greater stability. If you aim to save tax, Equity-Linked Savings Schemes (ELSS) are a suitable option, offering tax benefits under Section 80C with a three-year lock-in period.
Your risk tolerance should guide your choice:
High-risk investors may explore small-cap or thematic funds for higher growth.
Moderate-risk investors can consider balanced or hybrid funds for growth with stability.
Low-risk investors should look at liquid or money market funds for capital preservation.
Once goals and risk levels are clear, compare funds based on 3-, 5-, and 10-year performance, benchmark comparison, fund manager’s record, expense ratio, AUM size, and exit loads.
Also decide your investment style — SIP (Systematic Investment Plan) for disciplined long-term growth or lump-sum for one-time investments. Passive index funds are cost-effective options for those preferring market-linked returns with lower management fees.
What is the 7/5/3-1 rule for mutual funds?
The 7-5-3-1 Rule is a behavioral framework for long-term wealth creation through SIPs:
7 Years: Stay invested for at least seven years to benefit from compounding and overcome market volatility.
5 Categories: Diversify across five asset classes or mutual fund types to reduce concentration risk.
3 Phases: Stay emotionally disciplined through the three phases of investing — optimism, doubt, and fear — to avoid impulsive exits.
1% Increase: Increase your SIP by 1% every year to beat inflation and grow your wealth faster.
This rule acts as a guidance system for disciplined investing — stay invested for 7+ years, diversify smartly, remain patient through market cycles, and steadily increase your SIP.
In short: Don’t chase returns — build wealth with patience, planning, and prudence.
Disclaimer: Business Today provides market and personal news for informational purposes only and should not be construed as investment advice. All mutual fund investments are subject to market risks. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.