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At the time of selecting a mutual fund to invest, people do check the previous year returns of all the mutual fund schemes, so that they can easily pick out the best fund for themselves to invest, but point is, do analyzing the previous year returns for selecting the best mutual fund scheme to invest is the best guide?

Well, if one relies on previous year return and then picks out a fund to invest, then they generally end at picking up a fund that gave the highest return last year, and not a fund that has been consistent towards its performance for years.

Every investor’s choice is to invest in the highest return giving fund so that they can also gain a good amount of return on their investment, but stop here for a while and think wisely, are you on the right track?

Mutual fund investments are subject to market risk and are market-linked products, which perform as per the market performance. As they are the market-linked product it is a fact that, the returns from mutual funds vary from year to year, which means that what return it gave the last year, it is not necessary that, the same return it is going to give this year also, it may happen that the fund that gave the highest return last year, may give more this year, or may give low this year, or may give negative return this year.

If you invest based on what happened last year, you’re in for a surprise at the end of the following year; returns may be similar or maybe nothing like what you expected.

So here the question is, if past year returns are the worst parameter to pick out a suitable fund to invest, then how to select a mutual fund to invest for your goals, read and understand:

What to Do When One Cannot Predict the Market Trends?

It is always advisable to investors, always invest in mutual fund schemes, that leads you on the track to achieve your financial objective, be it retirement, wealth creation or child education fund. Do remember your investment reflects your future financial needs, so it is always good to first understand the purpose of your investment, and then invest, in that situation you will be able to make a better choice of the mutual fund scheme to invest that will help you achieve the expected return. Also, you need to understand that selecting funds based on previous year return, creates unreasonable return expectations that leads you down an unknown path.

What to Do, After You Got Your Objectives?

After you have recognized your objectives, it is now the time to look on other factors required to select a fund scheme to invest, some factors are analyzing the asset class in which the fund invests, the quality of the individual securities it holds, the fund manager’s experience, the investment strategy, and performance track record.

Investors need to understand, the performance track record is not the same for every year, so instead of tracking the previous year's return, it is always best to analyze, at least last 3- 5-year average performance, consistency of returns and the risk-adjusted returns. Do not forget to match these financial performances with the fund strategy and asset class.

Focus instead on a list of ‘don’ts’

In case if the above processes to pick out the best suitable fund scheme, seems difficult to you, focus on the list of don’ts, that is focus on what you shouldn’t do. Some of the points in your don’ts’ list are:

• Don’t invest based on the last one-year return.
• Don’t try to analyze mutual fund returns without understanding the fund’s investment strategy.
• Don’t forget to measure risk in context to the return.
• Don’t try to do all this yourself, get an advisor if you need to.

So basically, when you [plan to invest in mutual fund and you are at the stage to pick out the right fund to invest, do remember the above-mentioned points, they will help you select the best for you.

You can contact us at Shri Ashutosh Securities Pvt Ltd., for any assistance, we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).