Why you shouldn't chase Mutual funds with the highest returns| North Loop Official Blog
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27 Oct 2020

Why you shouldn't chase Mutual funds with the highest returns

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There’s absolutely no denying that investments help individuals build a strong financial corpus, be it over a short duration or over a long period of time. Individuals at the start of their career invest money in a more aggressive approach rather than the ones almost nearing the end of their careers. Every investor has an objective of earning good returns while investing money in different investment instruments, either to help realize their financial goals or to help fund any financial emergencies. But is chasing investment instruments that give out soaring returns, especially in the case of high return mutual funds worth it?

Well, the answer to that is most definitely no, as there as various other parameters investors need to look out for before making the decision to invest money in mutual funds. Investing in mutual funds that have delivered high returns previously can underperform at any time and being market-linked, it is almost impossible to predict when a fall can occur. Suffering a loss due to this and shifting to another mutual fund can only prove to be ineffective and costly. High risk high return mutual funds should only be considered in the case of long term investments

So, what are the other reasons why you shouldn’t chase high returns?

  • Dwelling deeper into the last few lines above, some small-cap and medium cap mutual funds that have performed extremely well, say in the previous year, may not have performed well in the year before that and so on. It is very hard to find extremely high performing mutual fund schemes delivering the same performance across a span of several years, so one must be sure to check the fund’s past returns over a 5-year horizon. So, what does this imply? Inconsistency- which is the last thing investors need to bank on for high return mutual funds as it can prove to be a very risky affair.

  • Past performance does not draw a 100% accurate picture of what lies ahead- Funds that have shown strong bullish trends previously can at any time see a complete slump and that may not be completely attributable to the performance of securities; but rather other external factors such as inflation, etc too can play a major role in the downward trend of the same. Performance up to the first year of the fund must not be a strong deciding factor for investors, rather the past 5 years performance, as well as the consistency, should be one of the core deciding factors.

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As an investor, what should I be on the lookout for while investing in Mutual Funds?

  • Before browsing through different mutual fund schemes, the first step every investor should take is to lay a proper financial roadmap. The amount of money that you are going to invest, the investment tenure, and your risk appetite are important factors while deciding your expected returns.

  • Once you’re through with the first step, the second step would be to decide which category and sub-categories of mutual funds to invest in in-line with your plan and go through with schemes that have consistent past performance.

  • The last step would be to choose the right fund management team and ensure that they have skill and experience and that their decisions will be in-line with your financial plan.It is wise for investors to choose high-risk high return schemes only in the case of long duration investments as even small slumps can be recovered from and played out over a long period of time.

Another thing investors should do is trust the choices of their fund managers, especially in the case of investors who are in it for the long term. Any shortfalls should not lead to investors pulling out of the investment as the funds may often take time to eventually play out and offer good returns.

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.