Who does not want to invest in only the best performing funds?
That’s why all portfolios look the same, we look at historical data and invest based on what is glorified in the media.
As a result, all our portfolios
will carry the top performers of the recent past or some legacy funds which
would have topped during a previous era.
The top performing funds are
based on past performance. We can no way assume their performance would
continue into the future.
- Check if the fund performance has been in the 1st 2 quartile, meaning in the first 50% in 7 out of past 10 years.
- Avoid flash in the pan performance funds
- No matter how hard you try, your fund is not going to remain in the toppers list year after year (see chart above)
- A fund manager may take a view in a certain market condition, there are chances he can go wrong even with the best experience.
- There can be times when a fund managers decision takes time to work, during which the fund may temporarily underperform and then start doing well.
- When the call works right, the fund will be rewarded with top performance, but if you had hoped to another top fund during the underperformance, you would miss on the rally in both the funds
- Top performing funds will lose its charm soon enough and can underperform in the next cycle. Remember markets are cyclical and no one stays at the top.
That’s why it is said the quest
for the best performing fund is futile.
Instead follow a disciplined process
and rebalance periodically.
If you see the data above, no best performing fund has remained on top the very next year
Systematically we can not predict who will be next winner, even if we get it right, it is just fluke and it will again change next qtr
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