How to choose a mutual fund for the long term?

Can you help me with a checklist to follow while choosing a mutual fund for the long term? I don't want to rely solely on past performance. - Anonymous

Relying solely on past performance can be misleading, as it only benefits those who invested before that performance was achieved. If a mutual fund delivered a 100 per cent return, it's valuable only to those who invested prior to that gain. For others, past performance is simply an indicator and doesn't guarantee future returns.

The real value of past performance lies in understanding how the fund behaved in both rising and falling markets and how quickly it recovered from downturns. Some funds may take a long time to bounce back, while others rebound strongly due to their underlying characteristics. Instead of expecting past returns to repeat, focus on these resilience traits.

Here's an essential checklist to consider:

Compare the fund's performance with peers

Evaluate how the fund has performed relative to other options in the same category over the long and medium term. Short-term performance (less than a year for equity funds) is generally not useful.

Look for consistent returns over time

Long-term returns are driven by a fund's ability to rise slightly more in up markets and fall slightly less in down markets. A fund that can't manage this balance may deliver disappointing results.

Check the fund manager's track record

Consistency in management is crucial. Verify if the fund's performance can be attributed to the same manager's strategy. If the manager has left, it could be a red flag.

While these factors are important, your own investment behaviour has an even greater impact on long-term returns. Staying committed to your investment strategy, avoiding panic during market declines, and continuing to invest regularly—even in down markets—will ultimately improve your results.

Also read: Is it wise to invest a lumpsum in an aggressive hybrid fund?

This article was originally published on November 14, 2024.