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Chasing past returns in a mutual fund might be bad idea


chasing past returns in a mutual fund

Many investors have realized the potential a mutual fund offers for a long term wealth creation. The asset under management for many fund houses has increased by 20-30% in the previous 12 months. It is a well known fact that financial advisers lure their clients by showcasing excellent past performance of mutual funds scheme.


Past performance may turn out to be a good idea - but studies show many funds can't sustain their leadership performance over a period of time. Well, let me give you few reasons why not to trust past performance?

Asset Under Management

As a particular mutual fund becomes a leader in it's own sector, many investors start to pour money considering the past performance. We have met many investors who invest a huge lump sum amount without having the knowledge of the asset details of a company.


As the AUM increases exponentially - it is difficult to manage huge amount. Mutual funds as per their guidelines, have a mandate to always stay invested at a particular percentage of their total assets under management.

Take an example of a list of stocks where the Mutual fund manager believes is priced correctly in a market. The stocks are included in the portfolio of the fund. But as the in pour of money continues in this fund - he would be tempted to buy these stocks at higher price or might think to move to a less quality stock portfolio to stay invested in the market. This might not be a good risk return scenario & can lead to a fund to under perform the market.

While taking a decision to invest, he/she should consider % increase in the AUM of the fund. If historical returns are great & AUM has increased exponentially by more than 30% in a short time frame - it might be a wise decision to stay away from the scheme.

Mutual Fund Manager 

Every mutual fund manager has it's own style of investing. If a fund has given multi-fold returns in last few years,but the management or mutual fund manager has changed recently - it might be a wise decision to wait & watch the performance of the fund for few quarters before deciding to invest. 

Market Performance

 Many investors were lured by 30-40% increase in many mid & small cap funds in the year 2017 & got trapped. What investors failed to realize was many mid cap indices were up by 40-50% for the same year & these schemes under performed the market. As the volatility returned in the market in early 2018 - these schemes again under-performed & fell more sharply than the equity markets itself.

It is a wise decision to study the returns of equity markets indices before considering fund returns. And when you realize the market is at an all time high and valuations are not justified, then make it a rule book not to invest a huge sum of money. SIP can be your best friend in such cases.

Mutual funds as an investment instrument has been gaining popularity over the years, thanks to the wide range of options available and the ease of KYC process. To know more about them, check out The Mutual Funds Sahi Hai campaign, launched by The Association of Mutual Funds in India (AMFI) at www.mutualfundssahihai.com


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