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How Not To Choose A Mutual Fund

Past Performance (by itself) is a really bad indicator of future returns

Past Performance (by itself) is a really bad indicator of future returns

Here are some facts based on data for the last 10 years:

  1. 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.
  2. The mutual fund that gave the best 10 year return never appeared in the top 20.
  3. 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.
  4. None of the mutual funds in the Top 20 ranking for 2001 made it to the top 20 more than thrice in the next 10 years.

While the data we analysed was for India, there is global evidence too. (Please see external link below)

The question then is: How do you choose a mutual fund to invest in?

And the answer is a little complex. When looking at diversified equity mutual funds, the performance of a fund is the only objective criteria available to you. But there are, as shown above, obvious pitfalls in considering recent or short-term performance.

Therefore, Scripbox looks at consistency of performance rather than absolute performance over a period. As a result the funds we select are not always among the top 10 or top 20 but are the highest ranked when using a modified measure – that of consistent performance. This has the added benefit of reducing volatility (fluctuations in value) of our basket of mutual funds.

The selection process we follow reduces 1800+ investment choices to 4 by applying a set of rules. A detailed description is available here: How do we select funds

External Link: Five-star mutual funds don't live up to their past

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