Stop looking at "Past Performance"
Have you ever got stuck in traffic? I am sure you have. Just imagine that you are going somewhere and stuck in traffic, you are unable to move an inch because of heavy traffic. What do you get? Frustration! And what happens when you are unable to move but the smaller cars in another lane are moving faster than you because that lane has less traffic than the one in which you are driving. More Frustration! Right? By seeing this it is obvious that you will think to change the lane and move to the faster lane. The moment later you change the lane and the lane which you left starts moving now and the new lane in which you entered stops moving due to traffic. Now what? Again you will feel more frustrated!
Similarly, not only in driving, but also in our life also whenever we see others are moving faster than us we change the track or fund in the hope of getting higher return and find ourselves stuck and then feel like we should have stayed in the previous one. Always remember before taking any step you should take advice from an expert or should wait. Frequently changing lanes rarely helps, whether in driving or investing.
Should you change Mutual Fund schemes based on Past Performance work?
Many investors after investing in mutual fund schemes start comparing the return of their schemes with that of other mutual fund schemes. And then they change their mutual fund schemes and switch money into other better performing mutual fund schemes in the recent past. And what happens next? They get disappointed just as they change lanes in heavy traffic.
In recent times, Past Performance has become a major criteria of the mutual fund selection system. Investing based on recent past performance is as risky as driving a car by looking only into the rear view mirror. It doesn’t mean that the rear view mirror is not useful but more than rear view it is your front view which is more important for smooth and safe driving. Past track record helps you in understanding the quality of scheme and ability of management team but past performance is not the guarantee for the future higher return.
One should always look at consistency of return apart from recent past performance. Consistency of return can be derived from rolling return analysis for various periods, which requires a lot of data crunching rather than just finding out the past one year return. You should also look at how the fund has performed during the best and worst period in the past. If you found some fund that is generating superior return then you need to check that at what cost they are generating. Choosing a fund from hundreds of funds requires lots of analytical skills, education and experience. You can do it on your own but it is very risky. It’s always advisable to take the help of the best financial advisor for building a quality portfolio and stick to it with discipline.
By this line I want to end this article. Hope you find this useful. For any query or financial advice call us at: 9792501234
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