If not past returns, then how do you select the right Equity Mutual Fund to invest in?

There are roughly 350 Equity Mutual Funds in the market. Selecting the right ones can be pretty complicated. Since we cannot handle complicated stuff, we resort to simpler measures even if they are incorrect and inadequate. The current method for selecting a fund based on the highest past returns is popular because of this very reason. This way of looking at returns is like driving a car looking at the rear view mirror. It’s misleading, inadequate and risky. Misleading, because it has the biases of when you started and how the markets are doing at the time of measuring the performance. It’s inadequate because it does not tell us how much risk the fund manager is taking and whether the fund is likely to perform in the future, the period we are interested. It’s risky because funds that give the highest returns today have stocks that are overvalued and likely to correct or stagnate.

So, how do I select an Equity Mutual Fund to invest in?

Finding a good Mutual Fund to invest in requires you to answer 3 essential questions:

1. What is the Right Fund?
2. ...........Read More

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