Past performance apart, which factors can help 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.
- Vishwanath Hariharan

Past performance is only valuable to people who invested before that performance was achieved. If a fund has given a 100 per cent return, and you invested before this return was generated, it is of great value as you earned that. Otherwise, all other investors can just see that performance. So if you are getting attracted to a fund by looking at its past performance, it is misleading.

I think the value of past performance lies in the way the fund has done in both a falling and rising market and how long did the fund take to make a comeback after the fall. Some funds fall and remain caught in it for long, and then some funds manage to make a comeback with a big roar because of their underlying characteristics. Rather than hoping to see a recurrence of that performance, look at these traits embedded in the past performance.

With this in mind, if I have to provide an essential checklist, first I would say look at how the fund has done vis-à-vis other funds, i.e., the investable alternative within a category in both long and medium term. The short term (less than one year in the case of equity funds) is entirely useless.

Now, long-term fund returns are generated by the fund rising a little more than others and falling a little less. If the fund can't configure itself to do that, it will give you a nasty surprise.

Secondly, one should check the fund manager's consistency. Can all the performance and returns be attributed to the same individual's thinking? If that person is not there, then it's a concern.

While these factors have a limited impact on your performance, the bigger impact comes from your long-term orientation. That includes you not running away after the fall, maintaining your investment strategy and being regular with your investments in a bad market. And that is what improves your returns.

This article was originally published on December 27, 2021.