Don't just look at a fund's one-year returns while investing in it

13 Feb 2019

People look forward to financial investment schemes with the hope that they will reap off significant benefits from it. This is a common thing in most places as people look up to ways through which they can increase their earnings and thereby fulfill their desires and wishes.

But when it comes to choosing the right financial fund, we often end up committing a few mistakes that cost us a good chance at making our lives a better one. How can you solve this issue and get the most suitable fund that will beautifully assist you in your financial planning process? Know the most useful steps from us!

We will help you in every step that you have decided to take in the world of finance and thus guide you towards your eventual goal. But why choose us? Wealthclock Advisors is a reputed name in the world of financial investment and our reputation speaks for our services. When it comes to fund selection, we advise every customer to refrain from committing some common mistakes. 

One of them involves analysing the one-year performance of one specific fund and then letting that be the basis for their ultimate selection. If you want to select from the top performing mutual funds in India, then there are other useful ways than this. This is a completely wrong step and we say that there are several reasons to stay away from being influenced by this.

We will discuss this elaborately below.

Why you should not trust the one-year performance of a fund entirely?

When it comes to analysing the one-year performance of funds and then making it the basis of selection, there are two noted problems associated with this. First the investor fails to quantify that the returns generated in the previous years where because of the Fund Selection or due to market conditions. If its latter than the next year would be debatable to achieve the same level of performance.  Secondly, because the previous 1 year returns might look attractive, investors might end up adding funds which doesn’t suit their risk profile A conservative investor would find the best performing mid or smallcap fund too hot to handle during a prolonged bear phase in the market. The scheme may be brilliant, but it simply doesn’t make sense to own it if it doesn’t match your profile.

These are two of the most common reasons which drive us to suggest you the same. The truth is that your portfolio is highly valuable. These two mistakes can highly impact your portfolio. 

With a weak investment portfolio, one will not be able to sustain for a long time in the financial market. Now let's look at how this wrong step can affect your investment portfolio.

  • Selection of chart toppers - 

    There are times when the financial market witnesses some rough phases. During then, a few funds manage to stand this test of time firmly and come out all shining. Not only do they manage to prevent losses but also are able to generate more than decent returns. When such things happen, they instantly catch the attention of investors.

    This is where the problem begins. Such funds then top the chart for that specific year and most people just look at their last performance. They forget to pay attention to their previous performances and when they will do this, they will see that most of these funds have a decent record in the long run.

    Their last 3-4 performances may be average when compared to their marvelous last performance. Thus, investors need to consider other points like volatility, long-term returns etc while selecting them. There is a very minimum guarantee that they will perform even decently the next year. At Wealthclock Advisors, we always suggest our clients to go for the Mutual Funds Investment Plans in India. As per our own analysis and conclusion, this is the best scheme for every kind of investor.

  • Having Multiple Schemes in the Same Category to diversify their risk - Investors generally believes that multiple schemes from like a small cap or mid categories would be a good idea as it help investors own all good stock in the segment. By doing this he is reducing the changes of earning more and removing the benefit of Diversification by adding more than 50-60 stocks with weightage of around 1-2% combined. Investors should should limit their investments to just one scheme from each major equity mutual fund category 

  • A quick change in preferences - A lot of investors behave in a typical way. They tend to prefer investment schemes as per the latest market return scenario. Like for example, in the year 2017, most investors wanted midcap funds. But when the scenario changed next year, their choices changed too and no longer midcap funds were in so demand.

    What this can do is, it can lay a significant impact on the eventual returns from your portfolio. If you look at the return figures of midcap funds over the last 5 years then you will notice that the results achieved every year is starkly different from one another. Given their volatile nature, it is extremely difficult to stay with them. So, if you have selected them on the basis of their one-year performance, then you are most likely to face lower returns the next year. If you panic and exit from the scene, you will encounter heavy losses. So, what's the best solution if you have invested in midcap funds? 

    Well, we recommend that you hold on to them for at least 5 years. What good will this do? The market has a habit of changing for good and so when this happens, a continued investment can lead to benefits received from such a rich market. 

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