Five questions to ask before you buy any mutual fund

Why a checklist

Most poor fund purchases come from the same short list of causes: the fund was recommended because of last year's return, nobody asked what the money was for, or the cost was never looked at. A checklist will not pick the best fund. It will stop you from picking the wrong kind, which is where most of the damage is.

These five questions work for any scheme, from a liquid fund to a flexi-cap. Ask them in order, because each one narrows the next.

1. What is this money for, and when do I need it?

Everything else depends on the answer. Money you need in a year belongs in a different place from money you will not touch for fifteen. The usual guide is that equity funds need a horizon of at least five years, and often more, because a fall of 30% or so can take years to recover; debt and liquid funds suit shorter periods.

Write the goal and the date before you open any fund page: "₹8 lakh for a car in 3 years", "retirement corpus in 22 years". If you cannot, you are shopping without a list. Our post on time-horizon buckets shows how to sort goals by date, and the goal calculator turns a target and date into a monthly amount.

2. Which category is it, and does it fit?

SEBI has fixed categories for equity, debt, hybrid and other schemes, and every fund must sit in one. The category tells you the job: a large-cap fund must hold mostly large companies, a liquid fund must hold paper maturing within 91 days. The SEBI fund categories guide lists them.

Two checks follow:

• Does the category match the horizon? A small-cap fund for a three-year goal is a mismatch whatever its record.
• Compare like with like. A mid-cap fund's return should be judged against other mid-cap funds. Our screener and compare tool filter by category so you do not weigh a debt fund against an equity one.

3. What does it cost?

The expense ratio is deducted from the fund's assets every day, so you never see a bill. It is the surest thing you know about a fund in advance, unlike its return.

Here is what a 1 percentage point gap does. Assume ₹10,000 a month for 20 years. The same portfolio earns an assumed 12% a year before costs in one plan, and 11% after a 1% higher fee in another. This is an illustration, not a forecast:

The impact of 1% calculator runs this for your own numbers. The practical steps are:

• Prefer a Direct plan unless you use a distributor for advice; see direct vs regular plans.
• Look up the expense ratio on the fund's factsheet, and read what a fund really costs for the hidden parts.
• Check the exit load, a fee charged on early withdrawals. It matters if you may need the money soon.

4. How risky is it, in plain terms?

Every scheme carries a riskometer label, from low to very high, set under SEBI's rules; the riskometer guide explains how it is worked out. It is a start, but it is a label, not a loss figure.

Ask the more practical question: how far has this fund fallen in a bad stretch, and could I have sat through that? Look at its maximum drawdown, the biggest fall from a peak (max drawdown). If a fund fell by a third at some point and a fall that size would make you sell, it is the wrong fund for you, however good its return. The risk profile questionnaire helps you see how much of a fall you can hold through.

Remember too that a high return and a high risk usually arrive together. Our guide to risk-adjusted returns shows how to compare funds on both.

5. How will I be taxed, and can I stay invested?

Tax rules differ by fund type, and they change.

• Equity-oriented funds: as of October 2026, gains from units held over twelve months are taxed at 12.5% above ₹1.25 lakh a year; sold within a year, at 20%.
• Debt funds: gains are taxed at your slab rate.
• Dividends from the IDCW option are added to your income and taxed at your slab rate.

The mutual fund taxation guide has the full picture. The point of this question is practical: every switch or redemption can create tax, so a fund you are likely to leave within a year is costlier than its return suggests. See also switching mutual funds is a taxable event.

Putting the five together

Run a fund through them in this form:

1. Goal and date: written down.
2. Category: fits the horizon, compared with its peers.
3. Cost: Direct plan, expense ratio checked, exit load known.
4. Risk: riskometer read, worst fall seen, and you could hold through it.
5. Tax: the likely holding period and rate understood.

If it fails any one, move on; there are many funds. Then read the factsheet for the manager, portfolio and turnover.

One more filter for new funds

New fund offers deserve extra scepticism because they have no record to check. See should you invest in an NFO for how the same five questions apply.

Official sources. Scheme documents and categories are regulated by SEBI, and the industry body AMFI publishes scheme data and investor guides. Read the scheme information document of any fund before investing.

This article is for education, not investment advice. Rules, rates and fund details change; verify them with the fund house and official sources before you act.