Investing
How to Pick a Mutual Fund Without Chasing Past Returns
Last reviewed: July 6, 2026
Most first-time investors pick a mutual fund by sorting a list by last year's returns and choosing the top result. It's the easiest number to find, and one of the least reliable ways to actually choose.
Why past returns alone are misleading
A fund at the top of a returns list for one year might have gotten there by taking on more risk than its category typically involves, risk that shows up as a much bigger loss the next time the market turns. Past returns say nothing about how that performance was achieved, or whether it's repeatable. A fund manager change, a shift in strategy, or simply a lucky sector bet can all produce a great single-year number that doesn't reflect the fund's actual ongoing approach.
What to check instead
| What to look at | Why it matters more than last year's return |
|---|---|
| Category and mandate | Determines what the fund is actually allowed to invest in, and what it should be compared against |
| Expense ratio | A recurring cost that compounds against you every year, regardless of performance |
| Consistency across market cycles | A fund that holds up reasonably in both up and down years is more dependable than one with one spectacular year and several mediocre ones |
| Fund manager tenure | A long-tenured manager means current performance reflects a track record, not a recent, untested change |
| Direct vs regular plan | The same underlying fund can carry a meaningfully different expense ratio depending on which version you buy |
Expense ratio, in concrete terms
Actively managed equity funds in India typically charge between 0.5% and 2.5% as an expense ratio, deducted from the fund's assets regardless of whether it made or lost money that year. Index funds and ETFs are far cheaper, typically 0.05% to 0.5%, since they don't require active stock-picking. As a rough check: a direct-plan equity fund charging more than about 1.2% is worth questioning, and a direct-plan index fund above about 0.25% is expensive relative to cheaper alternatives tracking the same index.
A worked comparison. Two funds tracking the same broad index, one direct plan at 0.15% expense ratio, one regular plan at 1.1%, will produce meaningfully different outcomes over a long holding period purely from that cost difference, even though they're investing in essentially the same underlying basket of stocks. Over 20 years on a ₹5,000 monthly SIP, that roughly 1 percentage point difference in ongoing cost compounds into a materially different final corpus, without either fund having to "perform" any differently.
Matching the fund to the goal, not the other way around
A fund shouldn't be chosen in isolation from what it's actually for. A short-term goal (2-3 years) has no business in an equity fund regardless of its returns history, market risk over that short a window can mean the money simply isn't there when needed. A long-term goal (7+ years) can reasonably absorb equity volatility in exchange for its higher long-run growth potential. Choosing the right category for the timeline matters more than picking the single best-performing fund within the wrong category.
The takeaway
Treat a fund's expense ratio and category fit as the starting filter, not an afterthought, and use past returns only to check for reasonable consistency across both good and bad years, not to find whichever fund had the single best recent number. A cheaper, boring, consistent fund that matches your actual timeline usually outperforms a flashy recent chart-topper once real costs and real risk are accounted for.
This article is educational and not personalised financial advice. Mutual fund investments are subject to market risk; read scheme documents carefully before investing.
Frequently asked questions
Is a mutual fund with higher past returns always the better choice?
No. Past returns don't indicate future performance and don't reveal how much risk was taken to achieve them. A fund's category, expense ratio, and consistency matter more than a single standout year.
What's a reasonable expense ratio for an equity mutual fund?
For actively managed equity funds, a direct-plan expense ratio above roughly 1.2% is worth questioning. For index funds, above roughly 0.25% in a direct plan is expensive relative to cheaper alternatives tracking the same index.
Should I choose a direct plan or a regular plan?
Direct plans skip distributor commissions built into regular plans, resulting in a lower expense ratio and better returns over time for the same underlying fund. Regular plans make sense mainly if you genuinely need and are paying for ongoing advisory support.