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Risk of looking at past indicators while investing in MF

Past performance is no guarantee that the future performance will be good of the mutual fund scheme. The same holds good for rating and ranking.

October 28, 2015 / 11:22 AM IST
Arnav Pandya

One of the things that a lot of investors actually do is look at past indicators while selecting their mutual fund investments. While looking at the past gives an idea about the manner in which the fund has been able to handle various conditions it is not a true reflection of what can happen in the future. This is the reason why investors should be careful in ensuring that when they consider these areas there is a proper analysis that is derived from the effort. Here is a look at some of the areas where the individual is looking at the past and areas where they need to take the right lessons from what they witness.

Performance

This is probably the biggest area where every investor tries to select a fund that has done well. The focus of the investor is often on looking at which fund has been on top and then choosing this for their portfolio. One point that they need to understand in this entire situation is that just because a fund has been on top in the past on the performance scale it does not mean that this will continue to do so in the future. In fact there is likely to be a period of time when the performance actually deteriorates and hence there has to be some element of patience that the investor would have to show. A lot of attention is given to how the fund has performed during various time periods of market movements and while taking a look at this is necessary one should not pay too much attention to the minute details as this might not matter in the coming time period when it is the actual portfolio of the fund that would be the determinant of what actually happens.

Rankings

There are also various rankings that are given to mutual funds wherein some factors are considered to determine how these have done and then they are ranked. Once again investors try and look at the same angle and see which fund is higher on the rankings and then try and include this in their portfolio. While a higher ranking is a good thing this should not be the only criteria that one should use for the purpose of selection of the fund and hence there would have to be a different manner in which the details related to the rankings are considered. The common mistake that people make is to choose the top ranked funds which increases the chances of these actually not performing as well as expected because in many cases the best is already behind them.

Ratings

There are several ratings including star ratings and similar kind of features given to funds by various sources and once again the idea here is to show which funds are in the top tier and so on. There are multiple factors that are considered by the rating agency when they give these kinds of star ratings including the performance plus relative position with respect to other funds and so on. Here once again investors rush towards higher rated funds and then when the ratings fall they dump the funds. This actually is not the appropriate behaviour because the investor is losing out on both fronts. On the upside when there is a higher star rating then the good show on all parameters is already reflected in the ratings so this does not allow for the participation in the gains already made. Similarly when the ratings slide and then the fund is sold then the poor performance has already been suffered by the investor and hence they have borne the brunt of the impact.

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