Kolkata: The AMFI data for Jan 2026 has revealed an expansion of both the AUM of the mutual fund industry as well as a rise in the number of folios in the industry. In Jan, the net AUM stood at Rs 81,01,305.58 crores against Rs 80,23,378.99 crore in Dec 2025. On the other hand the number of folios were 26,63,13,561 in Jan against 26,12,53,836 in Dec 2025. But what are the red flags that one should look for before selecting an MF scheme to invest? Let’s have a closer look.

Copying investment decision of others is never advisable. Neighbours, friends, relatives colleagues might have chosen a fund that suits their requirements — and each of us has our own unique needs and goals — and blindly imitating is not advisable. One must assess one’s own needs.

Who is the fund manager

The fund manager is the priest of any fund. He/she manages hundreds of crores of rupees that common investors put in that fund. So one should have a look at the profile of the managers including his/her qualification, track record, how the schemes have fared under him/her etc. Experts say an MF scheme must be process driven and not overtly dependent on the fund manager.

What is the Expense Ratio

This ratio indicates the cost that the AMC charges an investor for managing a mutual fund scheme. It is expressed as a percentage of the AUM of the fund. The higher this ratio, the more expensive is the service of managing the fund. An investor should try to keep this cost low, all other factors remaining comparable. At first glance expense ratios appear to be a small number. However, on deeper thoughts you will find out that if you are interested in really long-term investing, you might be paying a hell lot more for a scheme with a slightly higher expense ratio over a number of years.

Top holdings of a fund

The performance of any MF scheme is dependent on the constituents of its underlying portfolio. A fund’s portfolio is unique and skillful fund managers can make a difference here. One should also have a look at the amount of cash and cash equivalent a scheme contains.

Portfolio turnover ratio

This is a crucial metric since it is a measure of how frequently the scheme has bought and sold the securities in the portfolio. From a look at this ratio, one can get an idea of whether the fund manager has a habit of momentum play or is he/she investing for the long term. Usually investors prefer buy and hold strategy, which is also a signal for a well-thought out approach to investing and not taking knee-jerk responses by the fund manager. Significantly, a portfolio turnover ratio of 100% implies fully churned stocks. It also implies higher cost since more transactions will mean more costs.

Historical return

One invests for returns and by that logic, this should be the biggest proof of the performance of a fund. Before investing, a prospective investor must find out the long-term returns. This is especially true for equity funds. Returns of 3 years, 5 years and 7 years and sometimes from inception of a scheme must be looked at. Ideally one should invest in the long-term and take and call substantially on this metric. It often happens that a fund which used to generate high returns a few years ago and was a hot favourite of investors is no longer generating high returns and has fallen out of favour. Conversely, a fund which was not performing some years ago might be doing well now.

Experts always keep repeating that historical returns aren’t necessarily indicative of future returns. One must look at how a fund has performed in both bull phases and bear phases of the market. One should look for a fund which can avoid downside risks better than peers and the benchmark. If the same fund outperforms the market in bull run, then it is possibly a winner.

Risk measures

Every market instrument carries a certain element of risk. Therefore, one cannot invest in the market and avoid risk. One needs to manage it. Therefore, risk-adjusted returns are crucial in a scheme. There are two ratios that can measure such returns. These are known as Sharpe ratio and Sortino ratio. The former is more popular. Sharpe ratio refers to the difference between the returns of the investment and the risk-free return, which is divided by the standard deviation of the investment returns. It sounds quite complicated. The sum and substance of the Sharpe Ratio is the additional amount of return that an investor can get per unit of rise in total risk. Therefore, the higher this ratio, the higher the risk-adjusted return for a fund.

(Disclaimer: This article is only meant to provide information. News9 does not recommend buying or selling shares or subscriptions of any IPO, Mutual Funds, precious metals, commodity, REITs, InvITs and any form of alternative investment instruments and crypto assets.)