ELI5 guide to Selecting an Equity Mutual Fund

Step 1:

Identify the Category of fund needed.

The categories would fall into:

1. Large Cap fund

2. Flexicap fund (depending upon the manager’s decision, this fund can become a large cap or a predominantly mid/small cap fund)

3. Mid and Small cap fund

4. ELSS

This step is decided by you, the investor. And it is the most important step.

Step 2:

Goto Morningstar.in Analyst Rating Reports section. Link, and select your category of Step 1.

The Gold and Silver are the topmost qualities (and are equivalent). Bronze is slightly lesser (Use this, if there are no or only 1 gold/silver). Neutral is kind of neutral. Negative should be rejected.

As an example, I chose ELSS. I find out that there are 8 funds listed in there. There are 2 Silver and 1 Gold rated fund.

Step 3:

Open the individual funds in separate tabs, and in the Risk & Rating tab of the fund (the various other tabs in each fund are overview, portfolio, detailed portfolio, performance, history, factsheet, analyst research). Go down, skip everything, and look at the Downside and Upside capture ratio.

For the 3 funds selected above, the ratios are:

Fund	Downside Ratio	Upside Ratio
A	70-80	95-128
B	80-83	106-126
C	80-96	101-137

The lower the Downside Ratio, easier it would be to hold it for a longer period. So, in this series, A is better than B, which is better than C.

If the Downside ratio is nearly equal, look for one with higher Upside Ratio.

Step 4:

Open the Analyst Research tab again, and look at the Parent Company point in the sidebar. You should be looking for the Best Asset managers tag. In this case, all 3 have that tag, so the final ranking would be A>B>C.

If suppose, A has good / average asset managers tag, while B, C have best tag, then B>C>A.

More points:

1. No need to look at the Stars (they are not important). Reasons HERE.

2. Whenever you need to check the status of your funds, recheck this way.

3. You can actually read the research report to have more details. There are historical reports too in the Archive tab, if you want to go through the past reports.

4. If you don't like Morningstar, and want to do all this yourself, check out the Expanded Guidelines.

5. An earlier Short Guide.

6. FAQs for Mutual Funds here

7. This guide does not let me give me the fund which my friends / agents have told me and has given 80%/120% return in 1 year. Have a look at this series.