Why Chasing Top-Performing Mutual Funds is Not a Good Idea? (2024)

FAQs

Why Chasing Top-Performing Mutual Funds is Not a Good Idea? ›

Chasing top-performing Mutual Funds is risky because past performance doesn't guarantee future results. Investors often mistakenly believe that a fund's historical success will always continue. This strategy ignores market cycles, leading to investments at incorrect times.

There are times when a mutual fund may not be a good approach for you as an investor. Usually, this is when the management fee is high. High annual expense ratio, high load charges or high fees paid when an investor buys or sells shares are not good signs.

Insufficient diversification

An excessive concentration of investments in a particular asset class or sector that is currently performing well can result from chasing investing returns. While this might provide investors with large returns in the short term, the risk is elevated.

The rule of 8-4-3 for mutual funds states that if you invest Rs 30,000 monthly into an SIP with a return of 12% per annum, then your portfolio will add Rs 50 lacs in the first 8 years, Rs 50 lacs in the next 4 years to become Rs 1 cr in total value and adds further Rs 50 lacs in the next 3 yrs to reach Rs 1.5 cr.

Potential for loss: Mutual funds are not FDIC insured and may lose principal and fluctuate in value. Cost: A mutual fund may incur sales charges either up-front or on the back end that are passed on to the investors. In addition, some mutual funds can have high management fees.

Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.

Downside risk usually causes investments to lose value in the short term. Stock and bond markets may generate positive results over the long term, but market events can cause specific investments or sectors to decline in value in the short term.

For example, investing in high-yield bonds may offer higher returns than investment-grade bonds, but it also comes with a higher risk of default. 2. Yield chasing can lead to significant losses if the investments do not perform as expected.

You can chase money all day long, and some will succeed, but over the long-term, chasing money is never sustainable in any endeavor. Money is a by-product of value creation.

Put simply: More money isn't the only way to a happy, healthy, and meaningful life. Entrepreneur and best-selling author Gary Vaynerchuk said, “When you chase money, you're going to lose. You're just going to. Even if you get the money, you're not going to be happy.”

What is the 80 20 rule in mutual funds? ›

In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.

The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.

15 X 15 X 30 rule of mutual funds

If u do a 15,000 Rs. SIP per month for 30 years (instead of 15 years as earlier), at a 15% compounded annual return, You will be able to accumulate 10 CRORE against 1 crore if u invest for 15 years), said Balwant Jain.

The industry has been prone to mis-selling of schemes which has resulted in lack of trust amongst common people. Mis-selling is when a Mutual Fund distributor sells schemes which makes him/her more commissions instead of selling the scheme which is suitable for client's goals and risk taking capacity.

Mutual funds are largely a safe investment, seen as being a good way for investors to diversify with minimal risk. But there are circ*mstances in which a mutual fund is not a good choice for a market participant, especially when it comes to fees.

All funds carry some level of risk. With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value. Dividends or interest payments may also change as market conditions change.

He said that it is normal for any fund to underperform in the first few years due to equity markets in general not doing well or due to the fund's investment style not playing out. He added if the underperformance is due to these reasons, it is important to stick to the fund and continue with your investments.

Many factors can cause an investment to have a negative rate of return (ROR). Poor performance by a company or companies, turmoil within a sector or the entire economy, and inflation all are capable of eroding the value of the investment.

There is no guarantee you will not lose money in mutual funds. The profit and loss in mutual funds depend on the performance of stock and financial market. There is no guarantee you will not lose money in mutual funds. In fact, in certain extreme circ*mstances you could end up losing all your investments.

Stocks offer larger potential returns than mutual funds, but the trade-off is increased risk. Stocks can be a smart investment if you have a higher risk tolerance, want control over your trading decisions, and are comfortable conducting your own fundamental research or technical analysis to pick investments.