The Mutual Fund Show: Don't Invest Just By Looking At Past Returns

On the eve of the New Year, financial advisers reiterated that an investor should never invest in a mutual fund just on the basis of past returns.

"You will be up for a very unfortunate experience with your funds in terms of returns if you end up doing that," Kirtan Shah, managing director of Private Wealth Credence Family, told NDTV Prime.

He said this is because, "typically, when the cycle changes, you will see the same category of funds not favouring you for the reason why you actually got them on board. So, never look at past returns to dwell on the new investment for future returns."

Each mutual fund follows a certain style or theme, which, if supported by the markets, can deliver good returns, said industry experts. However, if they don't support it, then you make fewer returns.

According to Mohit Gang, co-founder and chief executive officer of Moneyfront, "If there has been no sector in your portfolio that has underperformed" through the year, then "you have not diversified your portfolio enough." He said that in such a case, you need to diversify your portfolio to ensure that you get good returns.

Looking at the past year and the top funds that outperformed, Gang said, "AUM (assets under management) and the structure of the fund—which is how much composition of mid, small and large cap have you played across the year—this year, that theme has played out very large."

Shah agreed with Gang that it was common among the top funds to follow certain themes to help them balance their investments and returns.