Equity mutual funds have the potential to generate higher long-term returns compared to FD, RD, or debt funds. However, not every equity fund is suitable for every investor. The key to earning better returns is choosing the right fund based on research-backed criteria instead of relying on popularity or short-term performance.

Below is a step-by-step guide to help you choose an equity mutual fund that truly delivers superior returns.

1. Know Your Investment Horizon (The Most Important Factor)

Equity mutual funds are suitable for long-term investing, typically:

Longer time horizon = Higher return potential + Lower risk through compounding

2. Choose the Right Category of Equity Fund

This directly affects your return potential and risk.

Safer Equity Funds (Stable Performance)

• Large-cap funds

• Flexi-cap funds

• ELSS (Tax-saving equity funds)

High-Growth Potential Funds

• Mid-cap funds

• Small-cap funds

• Multi-cap funds

High-Risk, High-Reward Funds

• Sectoral funds (IT, Pharma, Banking, PSU, etc.)

Rule:
Choose the category that matches your risk tolerance + time horizon.

3. Check Consistency of Returns (Not Just High Returns)

A good equity fund should consistently outperform:

• Its benchmark index (Nifty 50, Nifty Midcap 150, etc.)

• Its category average

Check:

• 3-year compounded annual growth rate (CAGR)

• 5-year CAGR

• 7-year CAGR

Consistency > One-time high performance

4. Risk-Adjusted Performance: Look Beyond Returns

Evaluate how efficiently the fund generates returns.

Important Metrics:

• Sharpe Ratio → Higher = better risk-adjusted returns

• Sortino Ratio → Higher = better downside protection

• Standard Deviation → Lower = less volatility

• Beta → Lower = less market-linked volatility

• Alpha → Positive = fund manager generating extra returns

Best Funds = High Sharpe & Sortino + Positive Alpha + Moderate Volatility

5. Check the Fund Manager’s Track Record

A strong fund manager = higher probability of better returns.

Check:

• Total experience (10+ years preferred)

• How their other funds are performing

• How they manage during market crashes

Frequent change in fund manager = red flag

6. Analyse Portfolio Quality

Look at:

• Top 10 holdings

• Sector allocation

• Market-cap allocation

• Diversification levels

What You Should Prefer:

• Funds that invest in high-quality companies

• Balanced exposure across sectors

• Not too concentrated (unless it’s a sectoral fund)

High-quality portfolio = Stable long-term returns

7. Look at the Expense Ratio (Lower = Higher Net Returns)

For equity mutual funds, expense ratio matters a lot.

• Direct plans → Lower cost → Higher returns

• Regular plans → Higher cost → Lower returns

For long-term SIPs, Direct Funds can create 5–10% extra wealth.

8. Check the AUM (Assets Under Management)

AUM indicates investor trust.

Ideal AUM Range:

• Large-cap funds → ₹10,000 crore+

• Flexi-cap funds → ₹5,000–20,000 crore

• Mid/small-cap → ₹2,000–8,000 crore

Very high AUM can reduce fund agility (especially in small caps).
Very low AUM indicates low trust.

9. Compare Rolling Returns (More Reliable Than CAGR)

Rolling returns show how a fund performs across all market cycles.

Prefer funds with:

• Strong 3-year rolling returns

• Strong 5-year rolling returns

• Low negative return periods

Funds performing consistently over time → Better reliability.

10. Check the Downside Protection

A good fund should fall less than the market during crashes.

Check:

• Maximum Drawdown

• Downside Capture Ratio

If a fund protects capital in bad times, it composes better in recoveries.

11. SIP vs Lumpsum Strategy

To maximise returns:

• Use SIP for disciplined long-term investing

• Use lumpsum only during major market corrections

SIPs reduce risk and enhance long-term returns.

12. Avoid Common Mistakes while Choosing Equity Funds

❌ Don’t chase recent high returns
❌ Don’t invest based on YouTube/WhatsApp tips
❌ Don’t choose too many funds (3–5 are enough)
❌ Don’t invest in small caps without long-term horizon
❌ Don’t stop SIPs in market correction

13. How Many Equity Funds Should You Own?

Recommended:

Owning too many funds reduces returns and increases overlap.

14. Checklist: What Makes an Equity Fund Capable of Better Returns?

A good equity fund generally has:
✔ 10+ year performance history
✔ Beating benchmark consistently
✔ Strong risk-adjusted metrics
✔ Experienced fund manager
✔ Low expense ratio
✔ Balanced, high-quality portfolio
✔ Good downside protection
✔ Strong rolling returns
✔ Low churn rate

If a fund passes 10/10 of these checks → It’s a strong choice.

Conclusion

To choose an equity mutual fund that offers better returns, you must focus on:

1. Your risk profile & investment horizon

2. Fund category selection

3. Consistency of performance

4. Risk-adjusted return metrics

5. Fund manager quality

6. Expense ratio

7. Portfolio strength

8. Rolling returns

9. Downside protection

The right equity fund will help you:

• Build wealth

• Beat inflation

• Achieve long-term goals

• Grow faster through compounding