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Reader’s question: 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
Past performance is not useless. But it is widely misread.
If a fund delivered 100 per cent returns over the past three years, that gain belongs to investors who were already in it. For everyone looking at it now, past performance is not a promise. It is a clue, useful only if you know what to look for.
The more useful question is not what the fund returned. It is how it behaved. Did it fall less than its peers during market downturns? Did it recover faster? A fund that consistently does both tends to compound better over time than one that simply had a spectacular year or two.
Here is a practical checklist for evaluating a fund for the long term.
Compare it against its category peers
A fund's return in isolation means very little. A 12 per cent return looks good until you realise every fund in the same category delivered 15 per cent. Always evaluate performance relative to other funds in the same category over medium and long-term periods. Short-term performance, less than a year for equity funds, is too noisy to be useful.
Look at rolling returns, not just trailing returns
Trailing returns show performance between two specific dates. They can flatter a fund that had one exceptional period. Rolling returns are more honest. Rolling returns measure a fund's performance across consecutive, overlapping blocks of time (e.g., every three-year or five-year window over the last decade), showing whether a fund was consistently good or just occasionally great. A fund with strong rolling returns has earned its reputation across many market cycles, not just one.
Check how it behaves in both rising and falling markets
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.
Pay attention to the expense ratio
Every mutual fund charges an annual fee, called the expense ratio, to cover fund management and operating costs. Over 15 to 20 years, a difference of even 0.5 per cent per year compounds into a meaningful gap in final wealth. Direct plans of mutual funds carry lower expense ratios than regular plans because they do not include distributor commissions. For long-term investors, the direct plan of the same fund is almost always the better choice.
Check the fund manager's track record
A fund's history is only meaningful if the same person built it. If the fund manager who delivered those returns has left, the track record belongs to someone who is no longer there. Check who is currently managing the fund and how long they have been doing so. A recent manager change is not automatically a red flag, but it does mean the historical performance carries less weight.
One thing the checklist cannot capture
All of the above matters. But the single biggest determinant of your long-term returns is not which fund you pick. It is what you do during the years you hold it.
Investors who stay invested through corrections, continue their SIPs when markets are falling and resist the urge to switch funds after a bad quarter almost always do better than those who optimise endlessly but act on emotion. The fund you stick with through a difficult market will outperform the perfect fund you abandoned at the bottom.
Also read: 4 steps to know if your mutual funds are working for you
This article was originally published on November 14, 2024, and last updated on May 27, 2026.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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