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I'm in early stage and trying to build my finance. I'm checking various Mutual funds and some of them have very good returns ~18%.

But I want to consider other factors like expense ratio and other. Can someone describe. What are all the factors one should consider before subscribing SIP of investing in mutual funds.

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basic reminder that past returns are not indicative of future results.

I strongly suggest you use the iShares portfolio builder tool as it provides specific asset class allocation recommendations based on how conservative or aggressive you want to be. While this is focused on ETFs you can find mutual funds for each recommendation. iShares Core Builder

I assume that "SIP" means "systematic investment purchase" or similar? Regardless, things to consider about investing in funds are things like:

  1. How risky is the investment?
  2. How volatile are its returns?
  3. What asset classes does the fund invest in?
  4. What is your time horizon for the money you're investing?

You should read this article too. Morningstar article about Mutual Fund Investing

Risk & Volatility:

There are a lot of ways to measure risk, most of them are based on how volatile the investment is. Consider 2 investments, both of which returned 12% over the past year. Investment ABC returned 1% each month. Investment XYZ returned -6% the first month, +14% the next month, -2% for the third month, and so on. At the end of 12 months you would have made the exact same amount of money in each investment. Investment XYZ however is much riskier due to the volatility of its returns.

Below is a screenshot of the risk page from Morningstar.com. To start with, just consider "Beta". Beta tells you if an investment is more volatile than the market as a whole. A Beta of 1 means that the investment typically equals the overall market volatility. A Beta >1 means it's more volatile; a Beta <1 means its less volatile

Asset Classes:

For equities, smaller companies tend to be risker than larger companies. For bonds, the longer until it matures, the more risk you assume.

Time Horizon: Money you're investing should be money you won't need for 5 years or more. You should be prepared to review your investments annually and not react to short term market trends. March 2020 was one of the best times to invest in the market but so many people sold because they weren't mentally prepared for a market downturn.

Over a multi-year time horizon the market will go down. Every time it does it will feel like "this time its different". Over the past 40 years, in hindsight, every down turn followed the same general pattern as other downturns.

As far as Fees/expenses go I'd suggest looking at passive/index funds. They will be the lowest cost you can find and whether you're paying 0.11% or 0.07% is an immaterial difference.

Morningstar Risk page

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Many times people are reluctant to take advice on financial matters, due to lack of trust or want of privacy. But, when it comes to mutual funds, it is always good to do background research and also take advice. There are many financial advisors that will readily help you and guide you in formulating an investment strategy and making it work, do try to seek out professionals.

Here are a few points to note before investing in Mutual Funds:

  • Opt for a mutual fund with a lower expense ratio. It is the cost of managing the mutual fund.
  • Check the taxation rules of equity, debt, and balanced mutual fund schemes.
  • You must check the portfolio of the mutual fund to determine the quality of the investment.
  • Check the mutual fund's exit load, the fees charged by AMCs when exiting the investment.

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