Question

A mutual fund manager achieve 12.7% annual return during last year. Is it possible that this is associated with inferior performance?

Answer 1

While looking at a fund's performance, do not be led by the fund's return in isolation. A scheme may have generated a 12.7 percent annualized return in the previous year, but then, even the market indices would be moving around that figure. Underperformance in a down market, i.e. when the NAV of the fund falls more than its benchmark (or the market), could still be a reason to review your portfolio.

Therefore, compare the portfolio return as against its benchmark indices return. A scheme not being able to beat its benchmark on a constant basis, need not be in place in your portfolio. If there are under-performing funds, then replace them with front runners after cautiously evaluating the new buys. Prominently, identifying under and over-performing funds is a need for a longer time horizon.

Chasing the past returns of mutual funds is not a very good idea. It’s not like that you should ignore it. But it should be considered along with other points.

As per the market study the past performance hardly ever provides adequate information to allow fund selection or elimination. And most of the time, present performance can be an illusion.