Looking for High Return Mutual Funds? Here’s How One Should Approach Investment in Mutual Funds

December 20, 2023 Mutual Fund

Investment in Mutual Funds has become more accessible and popular in recent years, with the rise of online platforms, low-cost index funds, instant diversification, spreading your risk across multiple securities/ asset classes, as well as the advantages of professional management, liquidity and flexibility.

Mutual Funds are a great way to invest in the stock market without having to worry about investing in individual stocks. One of the main reasons why people invest in mutual funds is that they offer an attractive return on investment (ROI).

Having said that, the pull towards high-return mutual funds burns bright for many investors, indicating visions of financial freedom and rapid wealth accumulation. With access to a wide range of schemes, online platforms have become the hunting grounds for many tech-savvy investors, making it easier to search for high-return investment options.

Additionally, social media has created a vibrant community of investors and advisors exchanging tips, strategies, and even specific fund recommendations for high returns. Some investors are willing to delve into sector-specific funds, leverage ETFs for short-term gains, or even explore emerging markets in search of higher potential returns.

[Read: Navigating the Market Landscape: How to Approach Equity Mutual Funds in 2024?]

While valuable insights from finfluencers can be gleaned, discerning reliable advice from mere hype or fluff requires a critical eye. However, it is important to remember that chasing mutual funds with the highest returns is not right.

Although these points show that many investors are taking high risks in the pursuit of earning better returns than some of the traditional investment avenues, the concerning part is the approach followed to pick the best mutual funds.

This article will help you comprehend the factors that should not be the sole basis for how you approach investment in mutual funds.

Why Chasing High Returns Is Not the Right Way to Invest

The ideal path to financial riches or wealth creation lies in understanding the suitability of mutual fund schemes and not in chasing high-return mutual funds. While the notion of skyrocketing gains might be tempting, navigating the world of investments is not about blind leaps but calculated maneuvers.

High-return investments often involve aggressive strategies and exposure to volatile assets like emerging markets or small-cap stocks. This significantly increases the chance of substantial losses, especially in turbulent market conditions.

Chasing consistently high returns may lead to unrealistic expectations that may cloud judgment and make you susceptible to short-term fads and risky bets, jeopardising your long-term financial stability.

[Read: Understand the Risk-Return Dynamics of Mutual Funds: A Practical Guide to Alpha and Beta]

The market fluctuations associated with high-risk high-return mutual funds can be emotionally draining, leading to anxiety, stress, and poor investment decisions driven by fear or greed. Plus, the focus on high returns can tempt you to put all your eggs in one basket, compromising the essential principle of diversification.

When blinded by the possibility of quick gains, you can easily lose sight of your long-term financial goals and risk strategies that don’t align with your needs and risk tolerance. Bear in mind that seeking high returns inevitably comes with higher risk.

A balanced approach and thorough research are crucial before diving into mutual funds. Understanding your own risk tolerance and financial goals is paramount before chasing any investment, regardless of potential returns.

Consequently, diversification remains a key principle, even within high-return funds. Spreading your risk across different asset classes and sectors mitigates potential losses.

[Read: A Year-End Review of Your Finances to Avoid Repeating Mistakes in 2024]

Are Mutual Fund Ratings Foolproof?

Most individual investors look at the star ratings of mutual funds and select those with good ratings like 4 or 5 stars-hoping that the funds would perform well and assist in reaching their financial objectives. This, however, is not the right approach to invest in mutual funds.

While star ratings can be a helpful starting point for your mutual fund scheme research, they should not be the sole basis for your investment decisions. Most of these ratings are given based on quantitative parameters, mainly historical returns, which may or may not be sustainable in the future.

Discover the unfiltered truth about mutual fund star ratings before you make your investment decisions. Join us for a must-attend webinar on December 21, 2023, where Vivek Chaurasia, PersonalFN’s Head of Research with over 15 years of expertise in mutual fund research and analysis, will unravel the truth behind mutual fund star ratings.

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You see, each rating agency uses its own methodology and criteria, meaning a highly-rated fund by one agency might not be considered top-notch by another. Ratings only evaluate specific aspects of a fund, like risk and return, and may not consider other important factors like the fund’s management team, investment strategy, or portfolio holdings.

If the performance of the 4 or 5-star rated fund you added to your portfolio today lags, it’s possible that it will lose some of its stars, or gloss. This explains why many investors may see their mutual fund portfolio underperform over time despite investing in highly rated schemes.

Thus, one cannot solely rely on mutual fund star ratings, as they may not be foolproof. Watch this video!

Should One Rely on Past Performance Data of Mutual Funds?

For the past few decades, the Securities and Exchange Board of India (SEBI) and mutual fund houses have been touting the message – ‘Past performance is not an indicator of future results.’

There is nothing wrong in judging mutual funds on the basis of past performance. It is considered to be a valuable tool for analysing mutual funds, but relying solely on it is not a safe bet. Historical data can offer insights into how a fund has performed in different market conditions, highlighting its risk profile and potential upside.

Market conditions change constantly, and past performance does not guarantee future returns. A fund that excelled in a particular market environment might struggle in another. For instance, some funds may have performed well for the last 3-6 months but were underperforming earlier for a long period.

[Read:  The Reasons Behind Mutual Fund Underperformance – A Comprehensive Analysis]

One may consider past performance alongside quantitative metrics like expense ratios, risk ratings, and portfolio holdings and qualitative factors like the fund’s management team and investment philosophy.

Therefore, the approach of looking at only past performance to decide which fund you will invest in is not a smart idea. Treat past performance as one of the steps to your fund selection process, not the final decision-making factor.

To conclude…

Remember, the path to financial success involves understanding the inherent risks and aligning investments with personal financial goals . Sustainable wealth building is a marathon, not a sprint. One may prioritize long-term stability, responsible risk management, and smart diversification over the elusive dream of overnight riches.

By employing a well-rounded approach and focusing on your individual goals, you can confidently navigate the investment landscape and build a secure financial future.

This article first appeared on PersonalFN here