Good performance needn’t be only criteria to invest in funds

Investors generally want to invest in the best performing funds available. There is a general tendency to select and invest in funds that have given the highest return in a year. This causes a lot of funds to be included in the portfolio. Each year, 10 tax-saving plans (ELSSs) that have given good returns that year find place in in the portfolio of investors.

But choosing funds based solely on one year’s best returns is not the right approach. We can see that the five funds which have given the best returns every year for the last five years have not been able to maintain the same level in the coming years. For example, four years ago, Aditya Birla Sunlife’s equity fund was the highest performing multi-cap fund. However, the scheme is only ranked 29th among the funds that have given high returns in the last one year. Therefore, it is not advisable to follow the ‘Top Five’ criteria of the last one year when selecting mutual funds.

Investing on funds based on the performance during the short-term is not the best option. Funds that have performed well this year may not necessarily be able to continue that level next year. Instead of short-term performance, funds with better performance in different market climates should be selected. When selecting funds based on long-term performance, you can reduce the number of schemes in your portfolio that you can handle.

Diversification is the spirit of disciplined investment. Investment diversification is also needed to reduce risk and ensure long-term returns. Investors should always keep this basic principle in mind when investing in equity funds.

When choosing to invest in a fund, the performance stability of that fund and the excellence of its long-term returns should be taken into account. Fund managers manage portfolios with a long-term vision. Therefore, fund managers are willing to sell and reduce the investment ratio if the growth potential of any stock or sector is fading. This could lead to the funds lagging behind performing well again.

Therefore, the fact that the performance of the last one year has not been included in the first five schemes is not a reason to assess the poor performance of a fund. There is also no basis for assuming that a fund that has lagged behind in the short term is unlikely to deliver well in the long run.