Choosing the Best Mutual Fund: Why Five Stars Aren’t Enough?

Suja felt excitement and panic as she sat across from her friend Vani at their favourite cafe. With her paycheck deposited in her account, she was determined to start investing before the end of the year. She wanted to start 2025 on a powerful note.

"Vani, I don’t know where to start," Suja confessed, sipping her favourite beverage. "There are hundreds of mutual fund options out there, and everyone I know is investing in equity funds. My friends say it’s the only way to get rich, my colleagues are always discussing their double-digit returns, and even my parents keep telling me not to miss out."

Vani nodded sympathetically. "Well," Suja sighed, "I want high returns so I can fund my post-graduation in the US, travel to Europe in April, and buy an iPhone Pro in June. I’ve found the best-rated fund (with a 5-star rating) and I’m seriously considering putting my money into it.”

Vani asked. "What makes you think a five-star mutual fund is the best option to achieve your goals?"

"Isn’t it why it’s rated five stars, it must be good, right? shrugged Suja,

Vani reminded, “A five-star rating is a useful place to begin but not the end goal. Here’s what you need to know.”

Methodology Differences
"Imagine two movie critics reviewing the same film. One person rated the movie five stars for the acting, and the other gave it three stars because they didn’t like the plot. Mutual fund ratings work the same way—every agency looks at different factors. For example, one might prioritize past returns, while another focuses on lower expense ratios or riskier funds.”

No Guarantee of Future Performance
“A five-star mutual fund tells you how well the fund performed in the past, but it can’t predict the future. Markets change, and so do fund performance."

Goals Matter
"Your goals are unique—saving for post-graduation, travel, and an iPhone Pro. But your friend might be investing for her retirement which is 30 years away. A five-star fund that works for them might not align with your shorter timelines. You need a fund that matches your specific goals and risk tolerance."

Understanding Risk
"Just because a fund is highly rated doesn’t mean it’s risk-free. Think of it like buying a fancy sports car—it’s great for speed, but not the best choice for a family road trip. Similarly, a fund might deliver high returns but come with high risk in shorter duration that may not deliver the returns you want.

Suja leaned back in her chair, processing what Vani had said. "So, a five-star rating might be a good place to start, but it’s not the end goal," she said thoughtfully.

"Exactly," Vani replied. "Investing is personal. The real end goal isn’t just picking the ‘best’ fund—it’s choosing the right one for you. Let’s start by defining your goals, understanding your timeline, and figuring out how much risk you can take."

"That makes sense," Suja nodded. "Where do we begin?"

"We’ll map out your goals and shortlist funds that align with them," Vani said. "It’s not about chasing stars—it’s about creating a plan that works for you."

What Do You Think?

Have you ever felt overwhelmed by investment decisions or chosen a mutual fund based on ratings alone? What was your experience like, please tell me in the comments.

P.S. This is an attempt at simplifying personal finance concepts for beginners. I’m using a conversational storytelling style to do this. Do share it with people who you think will resonate with it or want to learn from it.