More than half of India’s investors, 59 per cent, still consider past performance as one of the key benchmarks for investing in mutual funds and tend to redeem their investments within two years, according to a survey by Axis Mutual Fund. This is despite their awareness of the importance of long-term investing and compounding. According to data by AMFI, 22.2 per cent of equity investors stay invested for 12-24 months, and 48.7 per cent of equity investors redeem their portfolio within two years or less.
One common mistake that investors, especially first-time investors, make is evaluating and selecting mutual funds based on short-term past returns. These investors are often enticed by abnormally high returns over 1-2 years without realizing that what goes up must come down.
To choose the right mutual fund, the focus should be on financial goals rather than where to invest. This approach brings clarity and ensures investment risks align with the target time horizon. The fund should have a long-term track record of outperformance across market cycles, a high pedigree fund management team, adherence to investment strategies, and good governance.
While past returns, popular brands, and star ratings are factors to consider, they should not be over-emphasized. Instead, one should assess the fund’s performance relative to benchmark indices over different time horizons. Performance comparisons should be made within the same category of funds.
For Equity Linked Savings Schemes (ELSS) or tax-saving funds, analyzing historical performance is important. However, past performance is not a guarantee of future returns, considering the influence of various factors. A more detailed analysis can include portfolio allocations, fund age, market capitalization, and sectors of investment.
Fund selection can be simplified by sticking to index funds, which aim to mimic their benchmark. Evaluating expense ratios and risk appetite is also crucial. Diversification within the fund’s holdings is essential to mitigate concentration risk. It’s also important to consider the experience and track record of the fund manager responsible for the fund’s performance.