When you start searching for mutual funds, your mind naturally seeks simplicity. You want a clear answer to one pressing question: "Which is the best mutual fund?" You crave a name that promises guaranteed returns, beats inflation, saves tax, and never has a bad year. A name feels easier than a complex framework, and a quick winner seems better than a lengthy explanation.
The Trouble with Star Chasing
Past returns often become the most visible aspect of a fund. This focus can be dangerously misleading. If a fund tops the charts over the last one or three years, many investors assume it must be good. However, recent performance frequently reveals more about the current market cycle than the fund's actual quality.
Consider this scenario. An aggressive, concentrated fund will shine brilliantly during a roaring bull market but may perform miserably when conditions change. A steadier, more diversified fund might lag slightly during euphoric times but offers much better protection during market crashes. Which one truly qualifies as good?
Imagine two funds, Fund A and Fund B, both delivering roughly 12 percent CAGR over ten years. Fund A achieves this with wild swings: up 40 percent, down 25 percent, up 30 percent. Fund B stays within a narrower band, perhaps between -10 percent and +25 percent. On paper, their returns look similar. In reality, more investors tend to stay invested in Fund B through market turbulence.
Returns certainly matter. But how those returns were generated matters even more.
Define the Role First
A mutual fund is only good within the context of your specific needs. A highly aggressive small-cap fund can serve as an excellent satellite holding for a long-term investor with high risk tolerance. That same fund becomes a terrible choice as a core holding for someone saving for their child's college fees eight years away, especially if they panic during a 10 percent market drop.
Before judging any fund, ask yourself: good for what purpose?
- Is this a core fund meant to handle the heavy lifting for decades? Then it should be diversified, sensible, and not overly exotic.
- Is this a satellite fund intended to add extra growth? Then some aggression is acceptable, but within clear limits.
- Is this for a short or medium-term goal? Then a good fund might actually be a conservative hybrid or a high-quality debt fund, not the hottest equity pick.
At Value Research Fund Advisor, this question always comes first. A fund is never evaluated in isolation; its role in your portfolio takes precedence over its return chart.
Performance Through Market Cycles
A genuinely good fund demonstrates its character across multiple market cycles, not just during one favorable phase. We look for funds that perform reasonably well in bull markets, avoid complete collapse in bear markets, and recover sensibly after downturns.
This approach emphasizes consistency and downside protection as much as top-quartile returns. A fund that constantly swings between number one and number forty in rankings can be exhausting. A fund that consistently stays between, say, ranks five and fifteen might seem boring, but that steady consistency often builds lasting wealth.
We pay close attention to rolling returns and performance across different periods, not just the latest one-year number. We prefer a fund that has been good enough for ten years over one that has been amazing for two years and invisible before that.
Look Inside the Portfolio
Here is a simple test. Ignore the fund's name, skip the advertisements, and disregard the star ratings. Instead, examine what the fund actually owns. Ask a few basic questions.
- Is the portfolio reasonably diversified, or does it take huge bets on a few stocks or sectors?
- Does the fund behave broadly as its category suggests, or is a large-cap fund secretly running a mid- or small-cap strategy?
- Are the holdings sensible businesses you can broadly understand, or does the portfolio resemble a zoo of fads, turnarounds, and stories that require everything to go perfectly?
You do not need to become a forensic analyst. A quick review of the top holdings and sector spread reveals much about how the fund manages risk. This look under the hood step is non-negotiable. We avoid funds whose portfolios look like thrill rides disguised as long-term investments. A good fund should not surprise you every quarter with random personality changes.
Costs Matter Significantly
Two funds can appear similar in every way, but one silently consumes more of your returns due to a higher expense ratio. Over a single year, the difference between 1 percent and 2 percent costs may not seem dramatic. Over 15 to 20 years, it compounds into a serious drag on your wealth. That is why cost forms a key part of goodness, especially for core holdings.
This does not mean the cheapest fund automatically becomes the best. A slightly higher-cost fund that is clearly superior and well-run can still justify itself. But a high-cost fund that is merely average represents a clear no.
In long-term portfolios, we incorporate cost discipline. Where a good, low-cost option exists, we lean towards it, particularly for funds meant to serve as the backbone of your portfolio.
The Importance of House Culture
Behind every fund lies a fund house. Behind every portfolio stands a process. A good mutual fund is not just a star manager enjoying a lucky streak. It is usually backed by a clear investment philosophy that does not change every season, a risk management framework that prevents extreme behavior, and a culture that values investors' long-term interests over chasing assets or fads.
When that culture is strong, you see it clearly. Funds from the same house behave consistently, even when managers change. When the culture is weak, you witness abrupt strategy shifts, style flips, and funds trying to be everything to everyone.
This house culture plays a substantial role in long-term outcomes. Many investors ignore it because it is not visible in a single number. However, in the long run, it often matters more than a 1-2 percent return gap in any given year.
Putting It All Together
When selecting funds, the starting point should always involve narrowing the universe using a simple framework rather than hunting for the fund of the year. Before getting impressed by recent returns, ask a few basic questions.
- Is the fund right for the role you want it to play?
- Has it delivered reasonably consistent performance across different market phases?
- Does it protect capital reasonably well when markets fall?
- Are costs fair for what the fund delivers?
- Do the portfolio and fund house behavior inspire confidence?
This kind of filtering does not produce a single winner. More often, it leads to a shortlist of funds that work well together across various market conditions. Frequently, the most useful outcome is not adding something new, but letting go of funds that add excitement without adding stability.
A Better Question to Ask
So what truly makes a mutual fund good? Not just a high recent return. Not just a five-star badge. A good fund is one you can stick with over time. It does not force you to panic during bad years or feel overly clever during good ones. It quietly does its job while you focus on your life and your goals.
Once you start viewing funds through that lens, you stop asking, "Which is the best fund?" and start asking, "Is this fund good for me, in this portfolio, for this specific goal?" That is when fund selection stops being a guessing game and starts becoming a solid plan.
Sneha Suri serves as the Lead Fund Analyst for Value Research's Fund Advisor service.
Disclaimer: Recommendations and views on the stock market, other asset classes, or personal finance management tips given by experts are their own. These opinions do not represent the views of The Times of India.
