PAST PERFORMANCE IS NO GUARANTEE OF FUTURE BENEFITS
Have you ever found yourself caught in traffic? I’m certain you have. Imagine having a new car with a powerful engine, but being unable to move one inch due to excessive traffic. And what do you get? Frustrated! What if you can’t move yet the smaller cars in the lane next to you are moving quicker than you are because that lane has less traffic than the one, you’re in? More annoyance! Right?
As a human being, it is natural to feel compelled to change lanes and travel to the faster lane. And you change lanes using your driving skills. The lane you left begins to move again, while the new lane you entered becomes immobile owing to traffic. What’s next? The pinnacle of annoyance!
If you’re smiling as you read this, it’s because you’ve been there before, maybe more than once, and have mostly reached the pinnacle of frustration.
Not only for driving When we notice someone travelling faster than us and try to adjust our direction, we end up getting caught in a trap and feeling like we should have stayed in our lane.
Changing mutual fund schemes based on performance in the past
The same is true with mutual fund plans. After participating in a mutual fund scheme, most investors begin to compare their returns to those of other mutual fund schemes. In the recent past, we have changed mutual fund schemes and switched our money into better performing mutual fund schemes. What happens after that?
Past performance has recently become a crucial criterion in the mutual fund selection process. Investing just on the basis of recent historical performance is as dangerous as driving a car while only looking in the rearview mirror. While a rear-view mirror is helpful while driving, it is your front view that is more crucial for a smooth and secure drive.
While prior performance is helpful in determining the quality of a scheme and the management team’s abilities, recent past performance does not guarantee future results.
What else should be considered when choosing a scheme?
Apart from recent historical performance, one needs consider the consistency of return, which may be derived via rolling return analysis for multiple periods, which requires a lot of data processing rather than simply looking at the previous year’s performance.
In addition, one should consider how the fund has done in the past when compared to its benchmark and category return.
You can’t avoid looking at risk factors, either. If a fund generates a higher return, it is also vital to determine at what expense. What level of risk or volatility does it introduce into the portfolio?
Choosing a fund from a pool of hundreds necessitates a wealth of information, analytical abilities, education, and experience. It is possible to perform it on one’s own, but it is quite dangerous. It is always advisable to get experienced professional assistance in developing a high-quality portfolio and to stick to it with discipline.
Changing lanes frequently does not help when driving or investing.