How to Pick the Best Mutual Funds for 2026

Summary: Want to start investing in mutual funds in the new year? Find out how to pick the best mutual funds in 2026 from Dhirendra Kumar.

What key factors should investors prioritise when selecting mutual funds in 2026?

Don't try to make your investing process interesting or exciting. Let it be boring. Keep doing the simple things, and ask questions before you do it.

Keeping investing simple and understandable is crucial. We're entering very different territory right now. There'll be various developments in the market. There'll be apprehensions. If you keep it simple and master your game. 

Mastering your game includes five points:

1. Put your short-term money in deposits or debt funds
2. Invest your long-term money in equity
3. Keep investing steadily over a period of time
4. Make sure your money is diversified
5. Focus on a few strong funds and track them closely

If you invested in a diversified fund, but the money got concentrated in large caps, then take it out and diversify again. Diversify well and keep the funds a handful. Make sure that if you're investing through a mutual fund, some position is at least 10 per cent (or 15 per cent) so that you don't invest in more than 10 funds.

The result of investors making their lives interesting with investments is that they end up being collectors. Then they stop tracking their investments and become less interested. Then, you have some nominal investment lying around.

Sometimes, the investment does very well. You feel happy, but you don't realise much gain because the invested amount is small. So, investing should be done carefully. A few funds, invested well and kept track of.

Keep it simple, and that is smart investing. In our recent video, we explored a top-down approach to mutual fund selection that emphasises personalising your strategy to your individual circumstances.

Suggested read: What's the magic number?

How should investors balance risk and rewards when choosing between equity, debt and hybrid funds in 2026?

Mutual funds are a great investment vehicle where you keep your money. And till you take it out, you don't have to pay taxes. Assuming in your retirement, you think that you don't want that volatility. You should be investing 25 per cent in fixed income and 75 per cent in equity. You don't need much money, but you don't want those wild movements.

When you create that asset allocation, you'll be periodically rebalancing, right? If you choose an aggressive hybrid fund, you've achieved this. Not only have you achieved this, but you've also made it more tax-efficient. One is that until you withdraw any money, you won't be liable for any taxes. Second, it is possible that your money will keep steadily growing. The money will be less volatile compared to an all-equity fund.

The third thing is, if at all you take your money out, whatever will be the gain will be taxed at 12.5 per cent. One is that you receive favourable tax treatment, and your money grows passively. Your money is growing very well in a compact manner. Your 25 per cent fixed income gets treated as equity.

The main thing is doing your SIP in a diversified equity fund. I tend towards multi-cap funds rather than flexi-cap funds; that's because they seem to be doing the job of offering broad market exposure. Doing SIP and retirees putting their money in aggressive hybrid funds are very small tricks.

Suggested read: The fewer the merrier

What advice should investors consider regarding thematic and sectoral funds in 2026, given their popularity?

Stories sell. And mutual funds are also consumer products. So people are weaving stories - that this magic will happen, and that magic will happen. The problem with the story is that it becomes very compelling, whereas the story has already happened. After it has happened, it looks very attractive.

And investors' favourite pastime is to chase recent performance, and these sectoral and thematic funds build a very nice case. This has done very well, so ride the bus now. And you don't know whether the ride is coming to an end or whether you're at the pinnacle of that.

And it is very difficult to persuade investors who have made up their minds. Especially if it is a relatively new investor, it happened in the mid-90s, and it happened in the 00s, when the technology boom happened. In 2007, there were infrastructure funds, one after the other. So, the general tragedy of sectoral and thematic funds comes at an inopportune time. It catches the attention of the most vulnerable guy, who is not experienced. The story looks very compelling, and it is too good to be true to last forever.

Accidentally, it sometimes happens soon after you've invested. Then, it becomes a disappointing thing for a lifetime. So, to have a good experience, I think anybody who has crossed their 30s, 40s, or 50s should always start with an aggressive hybrid fund.

This is because you are just not used to the madness of the market, and somebody who is young can start with a small-cap or a multi-cap fund. But never start with anything that is narrow because one of the key benefits of investing in a mutual fund is gaining quick diversification with convenience. And that is a compromise.

Suggested read: Sectoral delusions

How important is a fund manager's track record when selecting a fund?

The fund manager is the biggest differentiator. Not because of how much he has earned in the past; that is one part of it, as it is a function of the state of the market.

If the market has crashed, I don't think any fund manager will help you escape that. But I would look at a fund manager who has been through one or two market cycles. And if the fund manager has successfully fallen a little less and has been able to rise a little more, I'll be fine with it. Then, I'd like to see how bad it gets when it gets bad.

This is because when the tide turns, there are some fund managers who make their portfolios illiquid. Their inexperience becomes visible. There are fund managers in whom I have so much confidence that even if they are not doing very well. For six months or even longer, they're still worth sticking around with. Maybe it is an opportunity for somebody to accumulate during the lean times.

So don't put mutual funds under a microscope. And if you're looking at mutual funds from that perspective, invest in an index fund.

Everybody should start and shouldn't make excuses for not investing.

Start with an index fund, start with an aggressive fund or even a thematic fund. But do your SIP. If you do your SIP, you'll have a positive experience. And that is very crucial for anybody to get started.

Suggested read: How to choose a mutual fund

Are there any other metrics that one should evaluate before making a decision?

From an investor's point of view, choosing the right vehicle is the first battle. Decide which kind of fund you'll have. If you're going to save taxes, then it is very straightforward - a diversified equity fund that is tax-saving. If you are done with your Rs 1.5 lakh, you don't need to invest anymore. One or two tax-saving funds are good enough to reach that limit. If you're investing for the long run, doing your SIP, choose a multi-cap fund. You can withstand the ups and downs through an SIP.

If you're over 40, getting started now, start with an aggressive hybrid fund. After you have done this, here's how I choose in three steps:

1. I go to Value Research and select a universe of 3-star, 4-star and 5-star funds for the category which I have decided.
2. In the mutual fund selector, I can choose multiple categories. So, I chose a diversified category, which is large & mid-cap funds, value funds, multi-cap funds and flexi-cap funds.
3. Once I have done this, I see a fund with a five-year history. This means that the fund has a three-year performance history as well. Then, I see if the fund manager is still around. It is all available in a listing on our Fund Selector page, including the tenure of each fund manager. And if the fund manager has been around for five years, and this fund has been able to deliver a little over the benchmark, and it is in the top quartile or the top half of the funds of that category, I'm fine.

I have a reasonable history of someone who has been able to withstand big declines and has been able to reasonably participate in a rising phase as well. And my 3-star, 4-star, and 5-star universe makes sure that it has an above-average risk-adjusted performance relative to its peers.

Suggested read: A practical guide to choose the 'right' mutual fund

What is the optimal strategy for experienced mutual fund investors to build a resilient long-term portfolio in 2026?

Start right away, and don't worry about the market. You'll get fifty excuses as to why you shouldn't invest. At the start of the year and on any special occasion, everybody will give predictions for what's in store or what's going to happen.

It is all useless. Make a plan and stick to it; that is what works.

Do you recommend investing in ULIP? Previously, it was not recommended to mix insurance and investment. With new-age ULIPs, the fund charges have gone down. One of the main advantages of ULIPs over equity mutual funds is that there are no LTCG/STCG charges when moving investment from one scheme to another, like moving from one equity index to, say, a debt fund.

The reason why I suggest that one should not mix insurance and investment is not that it is based on tax efficiency or because you can rebalance your asset allocation. I do it because insurance is a very important objective. Insurance coverage is my priority if I have financial dependents and no net worth.

Suppose I'm starting my career, I get married and have a small child; I'll need insurance. Nothing compensates for the need for a large coverage. That is the only way to secure myself financially. So, when you buy a ULIP, you don't get adequate insurance coverage, that's one.

Now, my second point is that if your fund isn't doing well, you can replace it with another fund. If your ULIP is not doing well, you can't take your money out because you'll lose all the benefits and all the coverage. And possibly, it will also become taxable.

With market-linked investments, you have to keep an eye on them. You can't sleep over them for many, many years. Third is that, if you want to mix up insurance and investing, you can achieve this goal in equity or debt by opening an NPS account.

You can put your money in NPS Tier 2, move your money from equity to debt, or vice versa. There's no tax incidence, and you can do this four times a year. If you can do that, your need is fulfilled, but it isn't bundled with insurance.

So, get your life insurance as a term cover, and make your investment in mutual funds. NPS Tier 2 is probably the world's cheapest fund management available to any person.

The bottom line

If you'd like help navigating the vast space of mutual funds, you can try out Value Research Fund Advisor.

Whether you're a new investor or seasoned pro, you'll find its expert recommendations helpful. As the platform can guide you on choosing the best mutual funds to invest in this year.

Click here to register for the next episode of Investors' Hangout.

Also read: ULIPs are useless as insurance products

This article was originally published on January 03, 2025, and last updated on January 02, 2026.