Are you new to the investment world? Do you wonder if you should invest in best performing mutual funds? Well, fret not. You are not alone. Several investors contemplate whether they should invest in top performing schemes or not. In this article, we will explore and try to answer the same. But first, let’s quickly recall what is a mutual fund.
What is a mutual fund?
Mutual funds are professionally managed investment vehicles that pools the money of several investors and invests in several securities such as equities, bonds, mutual funds, gold, real estate, etc. This pooled investment is professionally managed by a mutual fund expert known as fund manager. The fund manager along with a team of researchers and analysts look for the best mutual fund investment plans that can help an investor achieve their financial objectives.
One of the most common ways to select and choose a mutual fund scheme that best aligns with your investment portfolio is by choosing schemes that are in the top in terms of recent returns of the scheme. However, the problem is that a fund that is offering exceptional returns currently might not offer the same in the next market cycle. So where should one invest? Instead of looking at funds that are currently outperforming the markets, it might be a better idea to invest in funds that are consistently offering significant returns to investors over different market cycles. Why, you may wonder. Well, no fund has the potential to outperform the markets at all times during their entire investment cycle. Every mutual fund scheme has a tendency to perform in cycles. Hence, an investor must be cautious when they choose to invest in best performing funds.
As an investor you may consider comparing the performance of the scheme against other funds in the same category. This will give you a clear picture about how the funds are performing against peer funds. Another good idea is comparing the performance of the fund against the underlying benchmark. If the fund is constantly outperforming the underlying benchmark, it may mean that the fund is likely to offer good returns in the future as well. You may also choose to consider other factors that has the potential to affect the returns earned on your investments. It is a good idea to look for mutual fund schemes with a low expense ratio. Expense ratio refers to the net cost associated with managing and running a mutual fund scheme. The higher the expense ratio of a scheme, lower would be the take-home returns for the investor. Next, it would also be a good idea to check the credentials and performance history of the fund house or the AMC (asset management company) and the fund manager. This is because a fund manager and a fund house can largely influence the returns earned on mutual fund investments. Happy investing!