What is mutual fund? How to select best mutual fund scheme for investment?

 A mutual fund is an open-end professionally managed investment fund that pools money from many investors to purchase securities. Mutual funds are "the largest proportion of equity of U.S. corporations." Mutual fund investors may be retail or institutional in nature. 

The term is typically used in the United States, Canada, and India.

Mutual funds have advantages and disadvantages compared to direct investing in individual securities. The advantages of mutual funds include economies of scale, diversification, liquidity, and professional management. However, these come with mutual fund fees and expenses. Primary structures of mutual funds are open-end funds, unit investment trusts, closed-end funds and exchange-traded funds.

Classification of funds by types of underlying investments

Mutual funds may be classified by their principal investments, as described in the prospectus and investment objective. The four main categories of funds are money market funds, bond or fixed-income funds, stock or equity funds, and hybrid funds. Within these categories, funds may be sub-classified by investment objective, investment approach, or specific focus.

Fund structures

There are three primary structures of mutual funds: open-end funds, unit investment trusts, and closed-end funds. Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an exchange.

   

For choosing a best mutual fund scheme to remember these rules:-

1. Do not invest in NFO's: - Suppose there is 2 man's one established his business 10 years ago, and since last 10 year he borrowings money from people and give them 18% returns on their investment. 

Because he has already a well-established infrastructure, and well-diversified business portfolio and he expertly knew how to invest people's borrowed money in his businesses and able to give them returns near 18%.

Now, the 2nd man who have no experience, no any current businesses set up ask your money and promise you that he will also set up a well-diversified business portfolio like the first person and he promises that he may me also able to give you same return in the long term. 

Then where you invest your money?

I knew your reply " I will go with the first person  who has already a well-established infrastructure, and well-diversified business portfolio and he expertly knew how to invest people's borrowed money in his businesses and able to give them returns near 18%."

Same happen in mutual funds so do not invest your money in an NFO (New Fund Offer) because in this market many funds available with 10 years+ track record with well-diversified portfolio then why you trap your money with a new fund?

As my past experience in new funds it was not performed well and I regularly warn my followers that they do not invest in IPO or NFO.

2.Choose Diversified funds: - Some of the mutual funds invest only in large cap some invest only in mid-cap, and some invest only in small cap stocks. I think why we restricted our investment on market cap size. So choose diversified funds which invest money in all caps ( large cap, mid cap, and small cap companies).
3. Choose funds which provide 20%+ returns in last 5 years: - Bank FD give us near 8-9% annually returns, the index like Nifty Sensex growth rate near 15% annually so I will like to choose a fund who give 20%+ returns annually in last 5 years.
4. Choose fund size more than 5000 Cr.: -Please refer chapter 22 of my book "The Winning Theory In Stock Market" where I told how largest size funds able ! large returns. 

How you practically choose mutual funds schemes and ELSS from the help of moneycontrol site; open this link in your browser:-
http://www.moneycontrol.com/mf/find_a_fund/find_a_fund.php

If you want to know, 21 stock list for midterm / longterm SIP please do suggestion in comment box.