Getty ImagesMost mutual fund investors, rightly or wrongly, start their journey by looking at the one-year toppers in every category and picking the winners from them. If they were to look at the charts now, they would find that value funds, mid cap funds, small cap funds, and pharma sector funds are scraping the bottom of the barrel in the last one year.
However, it would be wrong to base your investment decision based on this one-year performance. Here is the proof: these mutual fund categories are the toppers in the 10-year horizon. Also, categories like long duration funds and international funds which are among the toppers in the last one year are nowhere to be seen in the long-term return charts.
“Many investors get into schemes which are displaying the highest returns at the moment or in the last one year. Many mutual fund forums also display returns charts where schemes from all categories are put in one basket. This is such a big mistake. An aggressive investor shouldn’t pick a long duration fund just because it is offering the highest returns in one year,” says Puneet Oberoi, Founder, Excellent Investment Advisorz, a New Delhi-based wealth management firm.
Mutual fund advisors say investors should go a little beyond both short-term and long-term returns while choosing mutual fund schemes. “The one- and three-year returns also impact the 10-year returns. The 10-year returns of categories that are doing well at the moment would also look better. This is why we believe that investors should dig deeper than just point to point returns,” says Vishal Dhawan, Founder, Plan Ahead Wealth Management, a Mumbai-based wealth management firm.
Mutual fund advisors also say that investors should not look at category averages as it doesn’t give you a clear picture. “There are schemes in mid cap and small cap segments which have managed their downside really well and have performed better than the other schemes. Investors should not select category of schemes based on average returns. Which category to choose is a function of your risk profile and your overall asset allocation,” says Puneet Oberoi.
These advisors also say that the recent performance of schemes will give you a blurry view because of the narrow rally. The market movement recently has been driven by select stocks and thus the rally has only been seen in the large cap segment. “The small and mid caps are still the toppers in the long term because they have the ability to generate 40% returns in one year. Looking only at the 10-year will not help investors. The entry and exit in a mid or small cap scheme can be tricky for people who are impatient or can’t manage risk,” says Vishal Dhawan.
Mutual fund advisors believe that DIY investors who don’t want to dig deep and choose schemes should get the help of a financial planner.
For investors who want to understand, here are four points these advisors think might help:
1. Look at rolling returns. These are not readily available on websites. You need to learn how to calculate them.
2. Look at calendar year returns rather than looking at point to point returns.
3. Check if the scheme has beaten its benchmark consistently.
4. Check risk ratios like Sharpe ratio. Apart from high returns, you also want the scheme to manage the downside well.
5. Check expenses of the scheme because that compounds to a big amount in the long term.
However, it would be wrong to base your investment decision based on this one-year performance. Here is the proof: these mutual fund categories are the toppers in the 10-year horizon. Also, categories like long duration funds and international funds which are among the toppers in the last one year are nowhere to be seen in the long-term return charts.
“Many investors get into schemes which are displaying the highest returns at the moment or in the last one year. Many mutual fund forums also display returns charts where schemes from all categories are put in one basket. This is such a big mistake. An aggressive investor shouldn’t pick a long duration fund just because it is offering the highest returns in one year,” says Puneet Oberoi, Founder, Excellent Investment Advisorz, a New Delhi-based wealth management firm.
Mutual fund advisors say investors should go a little beyond both short-term and long-term returns while choosing mutual fund schemes. “The one- and three-year returns also impact the 10-year returns. The 10-year returns of categories that are doing well at the moment would also look better. This is why we believe that investors should dig deeper than just point to point returns,” says Vishal Dhawan, Founder, Plan Ahead Wealth Management, a Mumbai-based wealth management firm.
Mutual fund advisors also say that investors should not look at category averages as it doesn’t give you a clear picture. “There are schemes in mid cap and small cap segments which have managed their downside really well and have performed better than the other schemes. Investors should not select category of schemes based on average returns. Which category to choose is a function of your risk profile and your overall asset allocation,” says Puneet Oberoi.
These advisors also say that the recent performance of schemes will give you a blurry view because of the narrow rally. The market movement recently has been driven by select stocks and thus the rally has only been seen in the large cap segment. “The small and mid caps are still the toppers in the long term because they have the ability to generate 40% returns in one year. Looking only at the 10-year will not help investors. The entry and exit in a mid or small cap scheme can be tricky for people who are impatient or can’t manage risk,” says Vishal Dhawan.
Mutual fund advisors believe that DIY investors who don’t want to dig deep and choose schemes should get the help of a financial planner.
For investors who want to understand, here are four points these advisors think might help:
1. Look at rolling returns. These are not readily available on websites. You need to learn how to calculate them.
2. Look at calendar year returns rather than looking at point to point returns.
3. Check if the scheme has beaten its benchmark consistently.
4. Check risk ratios like Sharpe ratio. Apart from high returns, you also want the scheme to manage the downside well.
5. Check expenses of the scheme because that compounds to a big amount in the long term.
Get Unlimited Access to The Economic Times
