One of the most popular investment options for investors is mutual funds. It provides a way for the investors to compound their investment and thus helps them in creating more wealth than many other investment tools. But there are nearly infinite plans for you to select in the market. Even if you filter the existing funds to suit your risk capacity and other parameters, you are still left with excess of plans to choose from. So, how do you handpick a few good ones among a plethora of attractive options?
The answer is, choose consistent performers.
Consistency is measured by looking at a fund's performance with regard to its benchmark and other average performers of the same category. In a bull market, a consistent performer earns more than their benchmarks and category averages. In a bear market, a consistent fund might give negative returns. But they will be less than their benchmarks. A fund that yielded high returns in the bull market but showed a severe dip in the NAV during volatile conditions is a fair weather friend, no one would wish to be acquainted with one and suffer losses.
Mutual funds are highly unpredictable in performances. You can never judge the future of a plan. But if the said plan has a good performance in the past, then it has greater chances of being profitable in the future. The past performance of a fund helps the managers get a glimpse of the fund in near future. Again, looking at one specific time scale would not be sufficient. It is important to compare various time scales to determine a consistent performer as some funds slip after a few years of good performance.
A good example would be Birla Sun Life Dividend Yield Plus. This scheme was one of the top 10 funds across equity schemes from 2005-2010. But by 2011, the scheme wasn't even in the top 40 funds. Another example would be the UTI Dividend Yield Fund that was a top performer from 2009 – 2011 and then dipped low from 2011 to 2013. This occurred as the stocks this fund targets saw a reduction in prices. Hence, relying on the history of a fund over a single measure of time is not fruitful. One should always analyse the performance of a fund over different time scales because only funds that have truly stood the test of time can provide good returns and overcome the market.
Another example would be the one-year wonders. Some funds underperform for years and then suddenly pop up among the top performers. But a look at the history of such funds would show terrible track record. It is wise to avoid such funds and not be fooled by their sudden rise in popularity. Though at times, such funds may be genuinely turning a corner, a one-year good performance is not enough to call it an improvement. It would be advisable to wait for 2-3 years and confirm their stay on the charts before choosing to invest in them.
Some funds may be the best performers of the chart at the time you look at them. But their track record would be quite erratic. Such funds are highly volatile. Although they might provide higher returns for a short time, they would suddenly dip and investors could lose their money unless they exit at the right time. For those with low to medium risk management levels, consistent performers are always the safe choice.
Other benefits of choosing a consistent performer: