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Here’s a Tip for You

An investment in the best current performing mutual funds, as measured by recent returns, is normally a danger and a mirage. The funds at the top seem to take turns in climbing over one another at absolutely incompatible clocks. Depending on short-term performance in the least bit intelligent as an investment method. For example, the highest-ranking mutual fund for the period 2018–2020 has now sunk to rank 190th today. The top mutual fund in 2021 was ranked 160th in the previous cycle. These rankings are a dramatic example of how volatile and unpredictable is the performance of funds.

Investors too often pour money into funds that have performed well recently, usually with the assumption that relative performance continues as an investment case. The result is over-optimism, and, more often than not, disappointment. Absolutist chasing of recent return performance, without context, is likely to lead to poor investment decisions; this occurs especially when the rankings at the top of the relative performance tables reflect discrete returns that represent only short-term excess returns.

Consistency of performance is so much more important than strong returns that come in blips. For instance, there is a drop in the Indian equity markets on an intra-year basis every year, but out of the last 44 years, 35 years have ended in gains. Here there has to be correct perspective towards the length of time in the horizon one should select any investment.

Short-term, performance-oriented websites and ratings can be very deceptive in the light of not giving the complete picture regarding a fund’s potential. Investors should focus on the overall track record, quality of management, and consistency of returns, as well as not be swayed by a fund’s current top-ranking status. What is of primary importance is having a well-thought-out, long-term strategy that will help one ride through the inevitable market volatility and, in the end, achieve true investment success.