K. Aravind
When evaluating the performance of a mutual fund, the first thing to assess is the returns. The past performance of a fund is not a guarantee for future gains, but the past return is a decisive factor in the process of deciding which to buy and which to avoid when making a choice between funds. At the same time, it is not possible to decide which fund to invest in based on the return alone.
If you intend to invest in an equity fund, it would not be much helpful to consider which are the highest yielding funds for making a choice. For example, on November 22, 2019, the Banking & Financial Sector Funds topped the list of equity funds with the highest returns of the year. If you are a beginner who intends to invest in equity funds for the next ten years, it may not be appropriate to opt for banking and financial sector funds only. Sector funds offer good returns only for certain period of time. Therefore, a long-term investor should invest a large share in multi-cap funds.
In that case, it would be futile to examine the schemes which have performed well in equity funds. Instead, the return of funds in this category should be evaluated for selection among multi-cap funds.
Period of investment is very important when considering the return of a fund. For example, when you value the performance of equity funds based on the last five years and compare it with the performance of the last 10 years it would be an entirely different picture.
The bull market has been in the stock market since 2013. Therefore, when evaluating the return of a fund for the last five years, one gets a picture of the performance in the bull market. At the same time, there has been a bull market and a bear market over the last ten years. Assessing the return of a fund over the last ten years gives a comprehensive picture of the fund’s performance in the bear market and bull market.
It is natural for investors to have a tendency to choose the funds that give the best returns. There is also a tendency to consider funds that have recently given good returns. At the same time, a fund that is topping the chart during a particular period may not be ahead in other periods.
Earlier, rating agencies used different criteria to determine which category a fund belonged to. SEBI has clearly defined the categories and the fund houses have adjusted the schemes likewise. Accordingly, the nature of some types of schemes has changed. The comparison is irrelevant in the case of such schemes.
