How to Compare Mutual Funds in India?

The number of people investing in mutual funds in India is growing rapidly. By June 2025, the country’s total Assets Under Management (AUM) had reached approximately ₹74.41 lakh crore, reflecting the increasing confidence of investors. However, many people still choose funds based solely on returns. The truly smart approach is to compare each fund based on its performance, risk, and expenses. In this blog, we will learn how to properly compare mutual funds to make your investments better and safer.

Step 1–Define Your Investment Objective and Time Horizon

Choosing a mutual fund starts here. Often, we jump straight to “Which fund is performing well?”, but the real question is what are your investment goals and what is your investment horizon?

The right fund for you depends on these two factors:

1. Short-term goals (1 to 3 years) : If you are preparing for a major expense in the next few years such as a wedding, a trip, or building an emergency fund then Debt or Liquid Funds are generally better. These funds are not significantly affected by market fluctuations and provide stable returns.
2. Medium-term goals (3 to 5 years) : For investors who want to invest for 3-5 years, Hybrid or Balanced Advantage Funds are considered good options. They contain both equity and debt, which helps control risk while providing decent returns.
3. Long-term goals (5 years or more) : If your objective is long-term such as retirement planning, children’s education, or wealth creation then Equity Funds, Index Funds, or Flexi Cap Funds are good choices.

Step 2 – Compare Funds Within the Same Category

Whenever you compare mutual funds, the first thing to check is the category to which the fund belongs. Every fund has its own investment strategy: some invest in the stock market, some in bonds, and some in a mix of both. If you compare them all together, the results can be misleading.

Understanding SEBI’s Fund Categories

SEBI has categorized mutual funds into several main categories for the convenience of investors:

• Equity Funds: These invest in the shares of companies and aim for long-term growth.
• Debt Funds: These invest in government bonds, corporate debentures, and fixed-income securities.
• Hybrid Funds: These invest in both equity and debt to try and provide balanced returns.
• Solution-Oriented or Index Funds: These track a specific goal (such as retirement or child education) or an index (such as the Nifty 50).
• Other Schemes: This category includes funds that don’t fit into the main equity, debt, or hybrid categories, often offering unique investment opportunities. Examples: Index Funds/ETFs, Fund of Funds (FoFs).
• Commodity Funds:These funds invest in commodities like gold, silver, or other natural resources, often through ETFs. They provide a hedge against inflation and diversification beyond traditional asset classes. Examples: Gold ETF, Silver ETF, Multi-Commodity Fund.
• International or Overseas Funds: These invest in foreign markets, giving Indian investors access to global companies and economies. They can be a good diversification tool but carry currency and geopolitical risks. Examples: Global Equity Fund, US-focused Fund, Emerging Market Fund.

There are also several types within Equity Funds

Equity funds are further categorized based on their size and strategy 

• Large Cap Funds: These invest in large companies like Reliance, HDFC Bank, Infosys, etc.
• Mid Cap Funds: These invest in medium-sized companies, where the potential for growth is higher.
• Small Cap Funds: These invest in small companies that can offer high returns, but also carry higher risk.
• Sectoral/Thematic Funds: These focus on a single sector such as FMCG, Pharma, or IT.

The Right Way to Compare :

When you compare a fund, always compare it with funds from the same category.

For example, Axis Bluechip Fund can be compared with ICICI Prudential Bluechip Fund because both fall under the Large Cap category. But comparing Axis Bluechip Fund with HDFC Small Cap Fund would be an incorrect comparison because both have different investment strategies and risk levels.

Why is this step important ? 

Each category has a different objective and risk profile.The objective of Equity Funds is to grow capital over the long term, while the goal of Debt Funds is to provide stable and secure returns. Comparing the two makes no sense. Therefore, always follow the rule of “compare within the same category.” This will allow you to accurately understand the fund’s true performance, stability, and value.

Read Also: Types of Mutual Funds in India

Step 3 – Check Historical Returns

When comparing mutual funds, most investors initially look at returns, but making a decision based  on last year’s performance isn’t the right approach. True wisdom lies in understanding a fund’s ability to perform consistently, not just its performance at a single point in time.

1. Focus on 3, 5, and 10-Year Returns : The true picture of any fund emerges when you look at its average returns (CAGR) over different periods such as 3 years, 5 years, and 10 years. This shows you how the fund has performed over the long term and whether it has maintained stability through market fluctuations.
2. Consider Rolling Returns : Point-to-point returns can sometimes be misleading, as they only show results based on a fixed date. Instead, look at rolling returns—these indicate how a fund has performed on average over various time periods. This metric is more reliable because it includes both good and bad market cycles.
3. Don’t Fall for the Short-Term Performance Trap : Sometimes a fund may deliver very good returns in one or two years, but its long-term performance is weak. Investing in such funds can be risky.

Step 4 – Evaluate Risk Metrics 

When choosing a mutual fund, it’s just as important to consider its risk level along with its returns. A fund’s performance only truly matters if it’s consistent and balanced. Below are some important parameters that indicate the fund’s actual performance:

1. Standard Deviation : This indicates how volatile the fund’s returns are. A lower standard deviation means the fund is more stable.
2. Sharpe Ratio : This measures how much return the fund has generated relative to the risk taken. The higher the ratio, the better.
3. Beta : This shows how much the fund’s returns fluctuate with market movements. If the Beta is greater than 1, the fund is more volatile than the market, and if it’s less than 1, it’s less volatile.
4. Alpha : This indicates how much better or worse the fund has performed compared to its benchmark. Funds with a positive Alpha are considered better.

Read Also: Best Money Market Mutual Funds in India

Step 5 – Expense Ratio and Exit Load

1. Expense Ratio : This is the small annual fee that the fund charges for managing your money. In equity funds, it’s typically around 0.5 to 2%, and lower in debt funds. The lower the expense ratio, the higher your net return will be.
2. Direct vs. Regular Plan : In a Direct Plan, you invest directly, so there is no commission and the expenses are lower. In a Regular Plan, investing through an agent adds a commission, which slightly reduces your return.
3. Exit Load : If you withdraw money from the fund before the stipulated time, you have to pay a fee of approximately 0.5%-1%. This is to discourage short-term withdrawals from the fund.

Step 6 – Check Portfolio Holdings and Diversification

Before investing in any fund, it’s crucial to see which companies and sectors it’s investing in. If a fund is heavily reliant on just one sector, the risk increases.

A good fund always diversifies its investments across different sectors such as banking, IT, FMCG, and pharmaceuticals. This is called diversification. In this way, the fund remains stable even if one sector declines, and the returns are more reliable.

Step 7 – Fund Manager’s Experience and Strategy

The performance of every fund depends on who is managing it. Therefore, it’s crucial to examine the fund manager’s experience and track record. A good manager makes the right decisions at the right time and knows how to manage the portfolio in changing market conditions. If a manager has consistently delivered good results over a long period, they are considered trustworthy.

Read Also: Best Thematic Mutual Funds in India

9. Step 8 – AUM (Assets Under Management)

AUM, or Assets Under Management, indicates the total amount of money invested in a fund. A large AUM generally suggests strong investor confidence and easier liquidity within the fund.

However, a very large AUM isn’t always advantageous. Especially in mid-cap and small-cap funds, a large AUM can make it difficult for the fund manager to invest effectively in smaller companies.

Step 9 – Benchmark and Peer Comparison

To understand a fund’s performance, it’s essential to compare it to its benchmark and other funds in the same category (peers). If a fund consistently delivers better returns than its benchmark, such as the Nifty 50 or Sensex, it indicates a strong strategy.

Peer comparison is equally important. By comparing your fund to other funds in the same category, you can understand how well your fund is truly performing.

Step 10 – Qualitative Factors & AMC Reputation

When choosing a mutual fund, you should consider not only the returns but also the reputation of the Asset Management Company (AMC) that manages the fund. A trustworthy AMC always acts in the best interests of investors and maintains consistency in its investment strategy. Companies with strong governance, transparent reporting, and a clear investment philosophy are the ones that consistently deliver good performance over the long term.

Read Also: Top Gold Mutual Funds in India

Conclusion

Choosing a mutual fund isn’t a race to see who’s offering the highest returns. The real question is which fund best suits your goals and risk tolerance. When you carefully understand and compare funds looking at their costs, performance, and stability the decision becomes much clearer. A proper comparison is key to making safe and smart investment choices.

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