Does it make sense to invest in a performing fund

The year 2019 has not been a great year for most of the MF schemes. Almost 15 per cent of the fund has generated a negative return and two-third of the fund has generated return less than 10 per cent in total. Only 4 per cent of the total fund has generated a return of more than 20 per cent. However, the frontline equity indices have generated a return of 14 per cent in the same duration.

Performance Summary of Equity MF Schemes (2019)

Most of the investors will be interested in only those 4 per cent of the fund, which has generated a return of more than 20 per cent. They will give in to temptation and buy these funds, chasing their attractive returns. This temptation is hard to resist.

Several pieces of research and my experience say that buying a hot fund or chasing returns is a bad idea. This is because styles, market caps, sectors, and industries tend to move in and out of favour in the marketplace constantly. Some funds are bound to soar for short periods if the manager’s style happens to be in the sweet spot. The best example in the current environment is the return generated by international funds and large-cap dedicated funds, which have more exposure to the finance sector. In 2017, the broader markets were the best performers. However, they are out of favour over the last two years. It has been witnessed that a fund that blazes in one market environment usually is as cold as ice in others.

So, what should you look if not the performance? You should emphasize on the consistency of the performance of the fund. These are the funds that rarely shoot out the lights and they do not get as much attention as their more volatile counterparts. Nevertheless, they can manage the downturn very well. They make up the shortfall in their performance during the downturn market when they contain their losses. These funds are better to stay committed, and often translates into good long-term returns.