Why Investors Shouldn’t Always Go For Best Performing Mutual Fund Scheme

Investing in mutual funds is considered one of the best ways to grow wealth over the long term. With a wide variety of schemes available in the market, investors often find themselves overwhelmed when choosing the right one. Many investors tend to focus solely on the performance of mutual fund schemes that are marked and shown by asset management companies (AMCs), or investment platforms, as part of their marketing strategy. This approach may not always be the most effective for individual investors.

Understanding Risk Profiles

Risk profile is an assessment of an individual’s willingness and ability to take on risk in their investments. It takes into consideration factors such as age, financial goals, investment knowledge, and risk appetite. This assessment helps determine the suitable investment options. Investors are categorized into different risk profiles, ranging from conservative to aggressive.

Conservative investors prioritize preserving their capital and are usually averse to taking on risk. On the other hand, aggressive investors are willing to take on high levels of risk in pursuit of potentially higher returns. Most investors fall somewhere in between these two extremes.

The trap of best-performing mutual fund schemes

When it comes to investing in mutual funds, most often investors tend to opt for the prevailing best-performing mutual fund scheme. AMCs often promote these schemes, leading many investors to believe that they are the top choices for everyone. However, what works best for one investor may not necessarily work for another.

The performance of a mutual fund scheme can be influenced by various factors such as market conditions, sector-specific trends, and fund manager expertise. A scheme that performed exceptionally well in the past may not continue to do so in the future. Therefore, blindly following the best performer can be a risky decision. A good financial advisor can guide investors to invest into schemes that align with their risk appetite and long-term goals.

Avoiding herd mentality

Investors often fall into the trap of following the crowd, especially when it comes to investing. By focusing on schemes according to their risk profile, investors can avoid succumbing to herd mentality. A good financial advisor can guide investors in making rational investment decisions based on their risk profile and investment objectives, rather than following market trends.

Performance is not the only parameter

While performance is an important parameter to consider, it should not be the sole criterion for selecting mutual fund schemes. Other factors like expense ratio, fund manager track record, fund house reputation, investment philosophy, and performance consistency should also be considered. A scheme which consistently delivers steady returns over longer periods is likely to be more suitable for conservative investors even if it does not appear as the best performer in a given year.

When investing, short-term fluctuations are inevitable. Instead of getting swayed by short-term performance/market volatility, investors should focus on long-term financial goals and stay committed to their investment strategy. Here, a financial advisor can play a crucial role in guiding investors during market downturns and help them make informed decisions basis their risk profile, allocate assets wisely, and review portfolios regularly.

In conclusion, when investing what matters is consistency in the performance of a scheme and ensuring the chosen investment is in alignment with one’s risk profile.

Disclaimer

The views are personal and are not part of the Outlook Money editorial Feature.