Why investing in current top fund is wrong strategy?

I enjoy answering questions on Quora. It is a fantastic platform to exchange knowledge and learn new things. I confess some of the blog ideas are straightway picked up from questions I observe on Quora. Lately, because Indian market is at its pick as of writing this article, please have started asking few very simple questions, allow me to put them in a template, “What is Best Mutual Fund to invest {A} amount a month?” OR “Should I switch to fund {B} because fund {C} did not do well last year?” OR “Is it good to add fund {D} because it did give fantastic returns last year?”. At times I do attempt to answer them but mostly my answer gets conveniently ignored because it is not what they expect. I tell them to not to chase current best, instead look for the long term good performing fund.

Let me tell you my own story to give you the context. I was below average at studies. Usually, I used to fail on exams except for final one, thank god. During one mid-term math exam I failed horribly, I scored 13 out of 50, wherein passing marks were 17. That time, my math teacher used to have an improvement program during lunch breaks, my teacher never gave up on such students. She worked hard on me, and it paid well. Next math exam I scored 45 out of 50. I was not the top scorer, the top was 49 if I am not wrong. But my teacher was the happiest person because I scored well. She believed in me that I can bounce back and do well. I still failed then onwards, but not in math. I used to be a high scorer in math at least.

Few people might think how above story relates to article heading. When I scored well on a math exam, I believe, the teacher was happier because an average student scored well. Similar way if you pick-up a good fund/stock which has potential to do well and when it does really well your returns will be beyond your imaginations, and you will be happy.

Choosing a recent chart topper and dumping current holdings are not a good strategy, in fact, it might incur losses. For example during 2008–2009 HDFC Top 200 was a top fund, but following years it struggled to beat peer-averages. Another example is Quantum Long Term Fund, it was market topper during 2012–2013 but it struggled in 2014–2015. Then it was ICICI Value Discovery. Similarly, Mirae Emerging Bluechip is current flavor of the choice. I can pinpoint numerous such fund stories, and mind you I am not at all doubting these fund manager’s capabilities. All I am trying to say is it’s relatively difficult to stay at the top in Mutual Fund, so you might join a Fund which had good last year but may not be able to repeat good performance and may turn out to be an average fund.

Choose a fund which has a long track record to deliver good returns and stick with it when it’s not doing well momentarily. In fact, that’s the time to maximize on the fund as it is available on cheaper NAV and has potential to bounce back. As my teacher did put extra hours to ensure potential student bounce back, please put some hours to ensure to invest in funds which can withstand market falls and has potential to bounce back. Do not Chase Topper blindly.

Think about it.

At the end, let me leave you with few relevant quotes from Warren Buffett.

“In the business world, the rearview mirror is always clearer than the windshield.”
“What the wise do in the beginning, fools do in the end.”

Enjoy.


Originally published at The Simple Personal Finance.