Stop chasing the 'best performing mutual fund' fad!

There is more to investing in mutual funds than just chasing the fad of the day, says Ramalingam K.

During my TV interviews, in each and every show, either the anchor or one of the callers will ask this question: which is the best performing mutual fund now? There is not a single show in which the question about best performing mutual fund is not asked.

Also, as a guest speaker, whenever I deliver a lecture at Rotary, Lions, Jaycees or Round Table, during the Q&A session after the speech, there definitely is a question on best performing mutual fund.

Everyone is interested in knowing which is the best performing mutual fund now. The reason behind this is they would like to check whether the scheme in which they have already invested is part of the best performing mutual fund scheme or not. If it were not a part of best performing mutual fund, they would like to switch their investments to the current best performing mutual fund.

There are so many web sites which rate mutual fund schemes, list down the best performing mutual fund schemes in each and every category.

But the question is: Should you actually chase the 'best performing mutual fund' fad?

The author is an MBA (Finance) and Certified Financial Planner. He is the director and chief financial planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Relevance of best performing mutual fund

Can a best performing mutual fund now continue to be a best performing mutual fund even after a week, after a month, after a quarter, after a year?

Then in that case, do we intend to switch our investments every week or quarter to stick only with the best performing mutual fund of the time.

Is it possible for a cricketer to score a century in each and every match?

Don't chase the best performing mutual fund. Regardless of the mutual fund scheme, the past performance shown is history. Past performance is just a guide to check how well the fund manager did in the past. The longer the period in which the best performing mutual fund is short listed, the better. But looking at the past performance is just like having a look at the resume of a job applicant. The applicant may be a topper in college or in her/his previous employment. However, that only provides the probability, and not the assurance, that s/he will be one in the future.

I am not saying one should not look at the performance of mutual fund schemes. It is really an important step in the selection criteria. But don't give over weightage to performance. Don't look only at the best performing mutual fund now. You need to consider other factors also.

Best performing mutual fund and some points to ponder over

Do you walk into a hospital or a pharmacy and ask them, 'which is the best medicine to cure a particular ailment now?' Even if you ask, will they be able to give you the right medicine?

Can a best playing cricketer, fit into T20 match as well as a test match? Both the games have different formats. So a best player in one format will not be a best player in the other format. Similarly a readymade list of best performing mutual fund will not fit for you, you neighbour, your bother as well as your colleague.

As we all have different financial needs and goals, we need different schemes to suit our needs and goals. A best performing mutual fund scheme suitable to my brother need not be suitable to me.

Beyond best performing mutual funds

Now, it must be very clear to you, that there are some other important parameters to be looked at beyond performance.

Requirement study: You should select a mutual fund, which is really suitable to your requirement. To do this, you should know what your requirement is exactly. Then you need to select the fund which is really suitable to meet your requirement.

Consistency: Instead of focussing on which is the best performing mutual fund now, you need to focus on the consistent performing fund over a longer period of time. Instead of choosing a fund which is a recent best performing mutual fund, you may choose a fund which is not in the list of best performing mutual fund of this quarter, but a consistent long term performer for a period of over 7 years. So consistency scores over the recent performance.

Existing portfolio: Also you need to select a fund which is not very similar in nature when compared to your existing mutual fund investments. Irrespective of the fact that, you own a similar fund already, if you invest in a fund just because it entered into the list of best performing mutual fund, it is like taking one more paracetamol tablet along with your regular paracetamol tablet of a different brand. This will lead to duplication and over exposure.

Considering all these factors along with the list of best performing mutual fund schemes will help you choose the right fund for you instead of looking at just the list of best performing mutual fund schemes.

Final thoughts

Investments are just tools like a hammer. If you are in the process of building your dream house, you need to concentrate on the home that you would like to live in with your family members for the rest of your life and not on the type of hammer to buy.

You need to keep in mind that investments are not ends in themselves. They only facilitate you to realise the superior goals in your life.