Never read too much into the short term performance of a mutual fund scheme.
Simply sort the mutual fund schemes on the basis of last one year returns and invest in the top two or three. That is how the schemes are picked by naïve investors. However, many of these top of the table schemes cease to be at the top of the returns table as time passes. That makes investors wonder if they have gone wrong. Vivek Rege, founder and CEO of VR Wealth Advisors says, “Lack of process to decide on the investments exposes investors to expectation mismatch. To overcome such a situation one should begin with his risk-profiling and then decide on the asset allocation. This should follow the selection of scheme.”
What really goes wrong?
The investors in such cases suffer from hindsight bias, say experts. The investors sort the schemes’ returns at a particular moment of time. Say for example, on January 1, 2018 had they sorted the mutual fund schemes on the basis of one-year returns, the small and mid-cap funds would have been at the top. The obvious choice would be to pick the small and mid-cap funds. Investing in the large cap oriented funds would have been a fool’s choice.
But as the tide turns the volatile markets change the scenario. Over past three months, large-cap funds as a category has lost 3.11% whereas the small cap funds lost 7.8%. For an investor who entered the small cap funds three months ago with an expectation to pocket higher returns, this is nothing short of shock.
“Never read too much into the short-term performance of a mutual fund scheme. Good performers in couple of quarters can distort the scheme’s performance numbers,” says Mohit Gang, co-founder and CEO of MoneyFront.in. Relying on a short term performance may make you buy into something ‘seasonal’.
How to fix it?
You have to overcome the temptation of taking a short cut. Just because the numbers of readily available they cannot be used. Instead look within. You should ideally be ascertaining your risk profile. Once you know your risk profile you can ascertain your asset allocation. You should then go for picking the right type of schemes.
Consider investing in a small cap fund or mid cap fund if and only if your risk profile is high or extremely high. If you are a moderate risk taker, you would be better off with a large cap oriented fund or a multi-cap fund. Do not generalise. Pick the schemes only after you know what kind of scheme you are looking for. “Apple to apple comparison is a must. Do not dump a large cap fund, just because it offers less returns as compared to a mid-cap fund,” says Mohit Gang.
You should pick only those schemes that have been stuck to their mandate and have delivered consistent returns over five years or more. “While picking up a scheme do not consider returns in isolation. Do look at volatility it has gone through over a period of time. Do check the drawdowns it has seen in the worst years. Ask yourself a question – can you sustain such losses?” says Rege.If you have already invested in a scheme, the performance of which has suddenly gone down, do not panic. First try to ascertain your risk profile and your asset allocation. See if the scheme fits in the overall portfolio you will design for yourself. If it fits, then you should continue holding on to it. If it does not fit, stop your SIP, if any. And gradually exit.