An investor should first decide the financial goals, if any, and then proceed further. In case, an investment is to be made for a short period of time, the best option will be a liquid fund. A liquid fund with a high 'AUM' and one which gives good service in terms of redemption on the phone or net should be selected.

In case of a longer term investment, equity mutual funds are the best. While selecting a mutual fund a close watch needs to be kept on the asset management charges and the portfolio turnover ratio. Rating of a particular fund is not that important.

The Myth of a Perfect Mutual Fund: There are many new investors that are on the lookout for a perfect mutual fund, one that offers maximum return with minimum risk. But they will be disappointed to know that such a mutual fund does not exist. Every mutual fund is on a risk return continuum. The ones that offer higher returns are by definition more risky.

Choose Funds Which Suit Your Risk Appetite:  It is mandatory for every investor to know their risk appetites before investing into mutual funds. The amount of risk you can take with excess cash is different from the one you can take with your retirement money.  Also as a young individual, you can afford to take more risk with your retirement money than someone who is at the end of his/her career. Ensure that you match the risk with the returns you expect.

Keep An Eye On The Costs: Lastly, choose the funds with least costs. It is well-known facts that firms that charge a lot of fees are not well managed. Good funds will ask for a profit share rather than upfront money.