Should You Invest Only in Best Performing Mutual Funds?
A mutual fund is one of the most sought-after investment avenues and is popular among the masses. Ease of investing through SIPs allows investors to park their moolah for short-term and long-term purposes. According to Crisil Research, last year equity-based mutual funds witnessed INR 91,000 crore in net inflows, and passive funds witnessed INR 1.14 lakh crores. But should you invest only in the best-performing mutual funds? Let’s find out.
The top ones
As a rule of thumb, we always research the top 10 or top 5 mutual funds before investing. But it may not be a wise decision to always chase the toppers as mutual funds are subject to market risks. The best-performing mutual funds may fall prey to market fluctuation and eventually turn out to be average or below-average performers in the long run. For instance, in 2011 you picked the top 5 mutual funds to invest in. However, these top 5 mutual funds are currently underperforming in 2022. This can affect your overall investment in these funds.
So, what should investors do?
Keep room for market volatility
You must understand that the performance of mutual funds depends on various factors that affect the overall economy. Hence, instead of investing in the top 5 mutual funds, you may consider spreading the risks by investing in equity, debts, index funds. Diversifying the portfolio will absorb the shock caused by market fluctuations.
Why just top performers?
When you plan to invest in mutual funds why should you only look for top performers? Why not add more parameters to your research. Several online tools are available for free to understand the risk scores, performance over the years, benchmark scores, and more. You can use these parameters to find a lucrative mutual fund of the future. Did you know that you can invest in several categories of mutual funds such as ELSS, Flexi-cap, index funds, large-cap, mid-cap, dynamic bond, hybrid funds, and more?
Market corrections
When the stock market dips by 10%-20% after the recent peak it is called a market correction. You can leverage this opportunity as you can buy more units with a lesser amount. If you are a beginner, it would be wise to plan for the long-term when investing in mutual funds during the correction. You can consider blue-chip funds for the long-term investment in mutual funds.
Index funds
These funds follow pre-set rules to track a specific category of investment. For instance, Nifty 50, Sensex, and more. Also, since these are managed depending on the indices and not actively managed by fund managers, you will enjoy a lower expense ratio too. An index fund simply tracks the index and is hence recommended to balance out the risks especially if you are a beginner. You will be amazed to know that these are known to grow steadily even during events such as pandemics and geopolitical events.
So, we hope this helps you the next time you decide to invest in mutual funds. For more information, please connect with us.
