Mutual funds have become one of the most popular investment options for Indians looking to grow their wealth over the long run. With thousands of mutual fund schemes available across different categories like equity, debt, hybrid etc., choosing the right funds to build an effective mutual fund portfolio can be an overwhelming task. It is essential to identify top performing funds that have consistently delivered superior returns over various market cycles. This article discusses some key parameters and criteria that investors can consider to shortlist the best performing mutual funds for their portfolio in the Indian market.

Factors to consider

There are several factors an investor needs to analyze to identify top funds that have the potential to continue delivering strong returns in the future. Some of the important parameters are:

●    Past Performance - The track record and past returns delivered by a fund over various time periods like 1 year, 3 years, 5 years and since inception gives a good indication of its performance capabilities. Funds that have consistently outperformed their benchmark indices and category averages over longer periods should be preferred.  
●    Fund Manager - Stability and experience of the fund manager is an important determining factor in a fund's performance. Funds managed by experienced managers who have successfully navigated different market cycles tend to deliver better long term returns. It is also good to check the track record of similar schemes managed by the same fund manager in the past. 
●    Portfolio Holdings - Analyzing the portfolio holdings and sector/stock allocation of a scheme gives insights into the fund manager's investment style and process. Diversified portfolios with strong businesses and quality stocks tend to perform better through market ups and downs. Concentrated portfolios require more active monitoring. 
●    Expense Ratio - The total expense ratio indicates the fund's operating costs which are deducted from the returns delivered to investors. Opt for funds with reasonably low expense ratios of less than 2-2.5% for actively managed equity funds.  
●    Benchmark - The benchmark index determines a fund's benchmark to compare its performance. Equity schemes are generally compared with S&P BSE Sensex or Nifty 50 returns. Funds able to consistently beat their benchmarks after factoring in costs should be preferred. 
●     Risk Metrics - Other key risk metrics like standard deviation (volatility), Sharpe ratio and alpha should be analyzed to understand the fund's risk-adjusted returns. Relatively lower risk funds delivering higher returns make for better long term investments. 
●    Rating - Ratings by independent agencies like CRISIL, ICRA etc. provide an indicative assessment of a fund's portfolio quality, process consistency and risk management. Highly rated funds (4 or 5 stars) tend to be more stable long term performers.

Monitoring and review

While past performance is an important indicator, investors should also continuously monitor the selected funds on these performance parameters. Funds can go through style and market cycle changes which may impact future performance. An annual review is recommended to check if a particular fund needs to be replaced due to falling ratings, poor recent performance or strategy/management changes. This approach enables investors to optimize their portfolio and maximize long term returns.

Conclusion

By comprehensively analyzing metrics like long term track record, fund managers' experience, portfolio quality, costs and risk-adjusted returns, investors can effectively shortlist the top performing equity and debt mutual funds to construct an efficient mutual fund portfolio. Regular monitoring and reviews further help optimize returns over various market cycles in the long run. Use systematic investment plans (SIP) for long term growth in top mutual funds.