Does It Make Sense To Invest In Winners?

The common tendency among those who invest in mutual funds is to simply look at some data and pick out the one that has been at the top, assuming that a fund which is performing well today will continue to do so in the future as well. There is something terribly wrong with such a strategy if you want your mutual fund to create wealth over the long term. The article explains the factors that must be taken into consideration prior to choosing the winner

Investors would have noticed the fact that, of late, the equity markets have been displaying good momentum. This is primarily due to the state elections results and expectation of continuity of the present government at the centre along with the return of foreign institutional investors (FIIs) and the US Federal Reserve turning dovish with hopes of beginning a rate cut cycle from March 2024. Given that mutual funds are closely linked to the equity markets, the returns offered by them have witnessed a spike too.

In the last one year, the lowest average return generated by any equity mutual fund category was 18.58 per cent. When it comes to individual funds, the lowest return generated by an equity mutual fund was negative 3.5 per cent, while on the higher end, equity mutual funds delivered return of 53.81 per cent in the last one year.

Tracking the Equity Market

The reason for such superior returns by mutual funds can be attributed to better returns by the equity market, especially the broader equity market.

After posting a low of 15,293.5 in mid-June 2022, Nifty 50 made an all-time high of more than 21,500 in mid-December 2023. Nifty 50 delivered absolute returns of 40 per cent and a compounded annual growth rate (CAGR) of 25 per cent in just 18 months. This was despite heavy FII selling. However, domestic institutional investors (DII) supported the market at that time, thanks to large SIP inflows.