Trap 7. ‘Recent Performance Of This MF Has Been Great, So You Should Invest’

Mutual funds often come with a standard disclaimer: “Past performance is not a guarantee of future returns.” Yet many investors overlook this important cautionary advice. So, if someone is trying to sell you a mutual fund based solely on its recent performance, you should consider it as a red flag.

Recently, small-cap and mid-cap funds have delivered impressive returns and have caught the fancy of investors and distributors. Small-cap funds, which invest in small- or mid-sized companies, have shown some of the highest gains over the past year. However, it is crucial to remember that past performance does not necessarily guarantee future returns, and these funds may not be suitable for you.

Small-cap and mid-cap funds can offer the best returns in a bull market, but they also come with higher risk due to the volatility and market fluctuations associated with smaller companies. Their performance can be badly impacted by market conditions, economic changes, and company-specific events, making them more risky compared to large-cap funds, which invest in more established and stable companies.

When considering an investment, it is essential to look beyond recent performance and evaluate how well the fund aligns with your long-term financial goals, risk tolerance, and investment strategy. A fund that performed exceptionally well in the past year might not be the best choice if it doesn’t match your individual financial situation or investment objectives.

To make informed investment decisions, you should consult a financial advisor who can provide a comprehensive assessment of your needs and recommend funds according to your risk profile and financial goals. Always perform due diligence and consider other factors, such as fund management, expense ratio, portfolio and so on, not just recent returns, when evaluating investment options. This approach will help you avoid falling for sales pitches based on short-term performance, and ensure that your investments are made in accordance to your financial goals.