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Why you should stop looking at "Past Performance"

  February 7,2019

Have you ever got stuck up in traffic? I am sure you have. Just imagine your car is  new brand with powerful engine, but unable to move an inch because of heavy traffic. And you get what? Frustrated! What happens when you cannot move but the smaller cars in lane next to you is moving faster than you because that lane has lesser traffic than the one in which you are driving. More Frustration! Right?

As a human being it is obvious that you would have strong urge to change the lane and move to the faster lane. And using your driving skills you change the lane. The moment later the lane which you left starts moving and the new lane in which you entered stops moving due to traffic. Now what? Height of frustration!

If there is a smile on your face while reading this, it means you have already have experienced it, probably not just once but more than once you have changed the lane and mostly reached the height of frustration.

Not just driving whenever in our life when we see someone is moving faster than us we try to change the course and find ourselves caught in trap and then feels like we should have stayed in our lane.

Changing Mutual Fund scheme based on Past Performance

So is the case with Mutual Fund schemes. Most investors after investing in mutual fund scheme start comparing the return of their schemes with that other mutual fund schemes. And many a times we change the mutual fund schemes and switch our money into other better performing mutual fund scheme in recent past. And what happens next?

In recent times, Past Performance has become a major criteria of the mutual fund selection system. Investing based on recent past performance is as risky as driving a car by looking only into rear view mirror. While driving, rear view mirror is useful but more than rear view it is your front view which is more important for smooth and safe journey.

Past track record definitely helps in understanding the quality of scheme and ability of  management team but recent past performance is not the guarantee for the future.

What else matters while selecting scheme?

Apart from Recent past performance, one should look at consistency of return which can be derived from rolling return analysis for various periods, which requires lot of data crunching rather than just finding out the past one year return.

One should also look at how fund has performed during the best and worst period in past compared to its benchmark and category return.

You also cannot avoid looking at risk parameters. If some fund is generating superior return then it is also necessary to check at what cost. How much risk or volatility is it adding into portfolio.

Choosing fund from the basket of hundreds of funds requires lots of data, analytical skills, education and experience. One can do it by  own but it is very risky. It’is always advisable to take the help of qualified professional for building quality portfolio and stick to it with discipline.

Frequently changing lanes rarely helps, in driving or investing.

Happy Investing!