Mutual Funds – Past Performance by itself is not a predictor of future returns

You can’t open a newspaper or read a magazine without seeing ads promoting the stellar performance of “hot” mutual funds. But past performance is not as important as you may think, especially the short-term performance of relatively new or small funds. As with any investment, a fund’s past performance is no guarantee of its future success. Here are some facts based on data for the last 10 years:

  • Most of the Top 20 mutual funds in a given year did NOT make it to the top 20 in the next year. In 2008 not a single mutual fund did.
  • The mutual fund that gave the best 10 year return never appeared in the top 20.
  • The mutual fund that gave the worst 5 year return (and the 5th worst 10 year return) was the top performing mutual fund in one of those years.
  • None of the mutual funds in the Top 20 ranking for 2001-02 made it to the top 20 more than thrice in the next 10 years.
  • Reliance Equity Fund was the top performer in the Large Cap category in 2012, with a return of 41%. Did you know it was the worst performer amongst Large Cap funds by historical return? i.e. if you were in Dec-11 and would have picked up this fund’s historical analysis, it was the worst performer by 1y, 2y, 3y, 4y and 5y return.
  • Another best performer, SBI Bluechip Fund (2012 return: 38%), never beat more than 33% of its peers ranked by past 1y, 2y, 3y, 4y and 5y return as of Dec-11.

Because of the way our brains our wired, we often believe that a mutual fund that did well in the past should therefore do well in the future.But that’s a mistake.

Look at more than a fund’s past performance

Over the long-term, the success (or failure) of your investment in a fund also will depend on factors such as:

  • the fund’s sales charges, fees, and expenses;
  • the taxes you may have to pay when you receive a distribution;
  • the age and size of the fund;
  • the fund’s risks and volatility; and
  • Recent changes in the fund’s operations.

What makes us different?

As the business cycle keeps changing not necessarily past top performing funds will continue to be the top performer for years to come.

We therefore use Elliott wave model in order to determine the maturity of trend and the funds that has potential to outperform along with inter-market analysis. We use patterns to determine the future path and not just past returns. This helps us to select the funds that have potential to outperform going forward.

Invest NOW in our top recommended funds!

Sources: US Securities and Exchange Commission https://www.sec.gov/investor/pubs/mfperform.htm

Business Insider India

http://www.businessinsider.in/The-Past-Performance-Of-A-Mutual-Fund-Is-Not-An-Indicator-Of-Future-Outcomes-96-Of-The-Time/articleshow/38330459.cms

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