In the select.def, look for the following line:
;Insert your characters below.
kfm, stages/kfm.def
Where it says "stages", omit this line, and make it look something like this
kfm\kfm.def
Do this for every character you install into mugen. Do this also for any screenpack you happen to use, outside of the default screenpack. This will force it to read from the "chars" folder more properly. As a protip, make sure the folder names for characters contain no spaces. Mugen is quite picky with folder names, if you don't use something like a hyphen or underscore.
The same applies for stages. Make sure the stage in question you are inserting, has the following setup. As seen below:
stages/kfm.def
The characters & stages are often in two separate parts of the select.def file. For characters, it is easier to use a backslash, for stages, it is easier to use a forward slash.
That should solve your problem.
You might want to have this moved by a moderator, over to
this part of the forum (Click it). As you would have gotten better help results there.