Don’t Get Into The Trap Of Buying Top Performing Mutual Funds!!

“Which brand is it?” is the famous question when we decide to buy any stuff. But this is a wrong question to ask while buying any financial product for investment. 

Financial investment products are subject to current market scenarios and not to the brand of the service provider. Hence, if your trousers have lasted for 10 years, you can buy the same brand again. But if a particular investment has given you great returns in the past, you should not consider buying it again without considering its current merit.

Mutual funds are the most preferred investment product, and previous returns are the most popular criteria for selecting them nowadays. But relying just on past performance to plan your investments and future security would be a mistake. Let’s take examples from different fund segments and understand how: 

Equity 

In 2020, when the Covid-19 outbreak started, there was an immediate spike in demand in the pharmaceutical sector. During this period of social and economic crisis, the Nifty Pharma index was the outperforming index and stood its ground for around a year. Not only that, it more than doubled between March 2020 and July 2021 (6500 to 14500). Which means, most of the pharma mutual funds also more than doubled between 2020 and 2021. 

But the same Pharma index has not done well since July 2021 and has been bearish. Anyone looking at the past performance of pharma mutual funds in 2021 would be tempted to invest in it, but it would be the wrong choice. 

The ICICI Prudential Technology Fund, which largely invests in equities of tech companies, showed massive gains of  27% CAGR in the last 2 years but has given a return of minus 16% in the last 1 year. 

In contrast, the Nippon India Banking and Financial Services Fund, a major equity fund, gave a return of just 8.9% in the last 5 years but has overpowered with 29% in the last 2 years. 

Debt 

The above patterns can be seen in several debt funds too. Debt funds are popular among investors due to their ability to generate more stable returns than equity funds, despite their lower returns in comparison. We often believe that no political or economic upheaval can shake our debt fund houses. However, this has not been the case. 

Take the example of the HDFC Short Term Debt Fund. Its performance shot up post the market fall in March 2020 and gave a solid return of 11.0% in 2020. But since then, it has been steadily declining, with 3.9 % in 2021 and -0.2% this year.  

In contrast, the ICICI Prudential Corporate Bond Fund Retail (Growth), a debt fund, has given stellar returns every year since the pandemic, its 3-year return being 7.7% and 1-year return 9.5%. 

Balanced 

Let’s look at balanced funds, which are a combination of equity and fixed assets.  

The Aditya Birla Sun Life Balanced Advantage Fund Direct Growth, for instance, impressed investors with an all-time-high 12.55% 3-year return, post the crisis brought about by the pandemic. In comparison, its last 1-year return has been disappointing, with just 5.13%. 

On the other hand, the HDFC Balanced Average Fund Direct Plan Growth fund has given consistent good returns, with 17.94% in 3 years and 17.11% in 1 year. 

This shows that investors should not buy mutual funds based on past performance alone. Mutual fund returns depend on the performance of the stock market. And no stock is destined to do well all the time as it has its own up and down. What we need to find are good quality funds that can give overall great returns in the long term and fulfil our financial goals. 

DISCLAIMER: Investments in the securities market are subject to market risks, read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory. Brokerage will not exceed the SEBI prescribed limit.