If you are a new investor, it is a no-brainer to select mutual funds that match your long-term financial objectives. So, before you choose the "right" mutual fund for you, you must carefully consider a number of factors such as investing objectives, risk tolerance, performance history, and competent management, among others. 

Investing in mutual funds is an excellent way to build wealth. However, with so many options available nowadays, it can be tough to choose the ideal one. "It's critical to align your investment goals and financial objectives with the mutual fund's offerings in order to make the best decision," says Deepak Gagrani, Founder of Madhuban Finvest.

Consider the following five variables before investing in a mutual fund: 

Risk tolerance

Before deciding on an asset class and fund category, one must select the fund depending on their risk tolerance. For example, an investor with a high risk tolerance may prefer a bigger allocation to stock.  

"If someone is 25 years old, they can choose a 70-30 equity-to-debt ratio." And within equities, clients can invest up to 40% in mid and small caps and 30% in large caps," adds Sridharan S., founder of Wallet Wealth and a Sebi-registered financial advisor.  If their risk tolerance is lower, they can invest up to 40% in large caps and only 30% in small and mid-caps, independent of market cycle.

But how can you assess your risk profile? Here is some advice for you. 

"Determine your risk tolerance by considering your level of comfort with market fluctuations and potential losses." If you can handle higher risk, invest in equities mutual funds; if you can tolerate medium risk, invest in debt mutual funds, and so on," adds Kuvera's Founder and COO, Neelabh Sanyal.

The Time Horizon Is Critical

It is also critical for investors to invest methodically rather than haphazardly. "Overall fundamental strategic asset allocation performs better over time." When the worst happens, they should use the time to accumulate units. Sridharan adds, "This helps average out the cost." 

"Key considerations include your risk profile, investment duration, liquidity, and tax implications." Furthermore, it is critical to investigate the fund management team's track record in terms of performance and general investor-friendliness," Mr Gagrani says. 

Performance in The Past 

Some experts believe that, among other things, the past performance and size of the fund should be considered when selecting a fund. For example, if a fund has provided strong returns in the past, it becomes popular among ordinary investors, even though future results are not guaranteed by any means. 

"Investors should examine mutual fund performance in the past by examining historical returns and comparing them to relevant benchmarks." "However, it is important to remember that past performance is not a guarantee of future results," adds Neelabh Sanyal, Kuvera's Founder and COO.

The Fund's Size

According to experts, a fund with a bigger asset size can provide stability, economies of scale, market impact, and diversification options. "Investors often consider AUM when evaluating investment providers, but it should not be the sole factor in decision-making," Sanyal said.

Diversification of One's Portfolio

To obtain higher returns, investors should avoid concentrating their investments in a single asset class or fund type. They should, ideally, diversify their investments across multiple categories and asset classes in order to hedge their risky investments with fixed income, or debt instruments. "Investors should investigate the value of diversification by investing in various asset classes and market sectors." "This strategy helps to reduce risk while increasing the potential for consistent returns," Sanyal adds.