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Are You Investing In The Best Performing Mutual Fund?

There are some important parameters beyond the past performance of a mutual fund that we have to look, says K. Ramalingam.

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Are You Investing In The Best Performing Mutual Fund?

When it comes to a mutual fund, everyone wants to know which is the best performing mutual fund now. Do we need to invest only in the best performing mutual fund? No.

Do we need to change our portfolio every now and then to invest only in the currently best performing mutual fund? No.

Are there any criteria we need to see before selecting a mutual fund? Yes.

Contemporary is Temporary

"Every tomorrow has been uncertain." - Warren Buffet

Best performing mutual fund in contemporary market is temporary. Today we can say which one is the best performing mutual fund. But, we can't say the same in future.

In reality shows, the judges will announce "the best performer of the week" award every week. But there is no assurance that the same person will get the award every week. Mutual fund is also like that. It will change once in a while. We can't say the best performing mutual fund of this year will be the same after five years.

"There is nothing permanent except change."-Heraclitus.

Past Performance of a Mutual Fund:

Here, I want to compare the best performing mutual fund with a cricket match.

The past performance of a mutual fund is like the review of the previous match where we can highlight the plus and minus.

The currently best performing mutual fund is like a Live Match. We can watch and enjoy. But the live match will eventually come to an end.

Investing in currently best performing mutual fund is like assuming the winner of the upcoming match based on the live match. We can't be sure whether the same team is going to win the next match.

It doesn't mean you should ignore the past performance of a mutual fund.

Performance of mutual funds is one of the factors (and not the only factor) which helps you to choose the right mutual fund. Don't chase only the best performing mutual fund.

Beyond Best performing Mutual Fund to select a Mutual Fund:

There are some important parameters beyond the past performance of a mutual fund that we have to look. We need to consider things like our goals, needs, liquidity, other investment plans, and tax planning. We just can't blindly invest in a mutual fund for the best performance. We should consider all the above things before investing in the mutual fund.

Best for You:

"It is not enough to do your best; you must know what to do, and then do your best"- W. Edwards Deming

Who doesn't want the best?

Everyone wants it, including me. But, which one is the best?

Lump-sum or SIP Investment?

Long-term or short-term Investment?

Mutual fund or equity investment?

We have more than one choice in everything. What we choose matters.

Everyone has different goals, income and expenses.

Long-term investment can be suitable for one person. But, we can't say the same for another person.

The same applies to the best performing mutual fund.

It may be the best for another person, but, there is no assurance it will be suitable for your requirements too.

A best performing mutual fund scheme may be the best for your friend/ colleague. But there's no assurance that the same scheme will be the best for you too because your needs will be different from your friend.

So choose your best to meet your needs, and not just the best.

You don't have to invest in some mutual fund because of its performance. Like I mentioned before, your needs are different from your friend or others. So, your investment scheme may be different from your friend or others.

Long-Lasting performance:

Yesterday's best performance is today's past performance. We don't know if today's best performing fund will retain the same performance tomorrow. An average performing fund may become the best performing fund tomorrow. We always can't depend on the best performing fund. Instead, we can focus on the fund which has been doing great consistently in the mutual fund world for a long time. It may not be the best. But, it can't be the worst fund in the meantime.

Existing portfolio:

"Strength lies in differences, not in similarities"- Stephen Covey

Think before selecting the same mutual fund scheme you already have because of its current performance. What will you do if the fund starts underperforming?

Having two mutual fund schemes in same nature is like having the same dress in two different colours.

Instead, you can diversify into a different category of the fund based on your existing portfolio.

Final Thoughts:

"The biggest adventure you can take is to live the life of your dreams." - Oprah Winfrey

Your dreams are part of your life, and they give meaning to your life. Your investment is a tool which helps you to reach your dreams. Just remember, investments are not ends in themselves. They help you to understand the superior goals in life.

To achieve superior goals of our life, we need complete and comprehensive financial plan which covers everything from goal setting to execution towards the achievement of your goals.

Consider all these factors along with the list of best performing mutual fund schemes. It will help you to choose a fund which is the best for you instead of looking at the list of best performing mutual fund schemes.

(K. Ramalingam is the chief financial planner at Holistic Investment Planners, a financial planning and wealth management company.)

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.
 

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