scorecardresearchMutual Fund Investing: 3 reasons why historical performance can mislead

Mutual Fund Investing: 3 reasons why historical performance can mislead you

Updated: 15 Dec 2022, 11:29 AM IST
TL;DR.

Overperformed companies historically get a greater span of attention than other companies. In this article, we will understand why making an investment based solely on the historical performance of an index or company might adversely impact your portfolio.

Myths of mutual fund investing

Myths of mutual fund investing

When you choose any kind of investment, be it index funds, mutual funds, or a particular company stock, the very first thing you see is their historical performance, which matters primarily as well. But, have you ever thought about whether such a historical performance promises future returns or not?

There are a lot of other aspects to look at before making an investment along with the historical performance of the avenue. Here are 3 reasons why depending solely on past records can mislead your decisions.

Growth potential

By looking at the company's minutes of AGM, you will be able to decide whether their future visions are sustainable enough to grow your money. In the past, the company or index might be able to perform well because of the trend or government’s support, or various other factors relating to the macro and micro economy. But, future returns depend on the current economic scenario and internal management as well.

If the internal management of the company is looking forward to expanding its operations in the path where the economy is going, growth potential is much higher even if the industry has not given decent returns in the past.

Prevailing economic conditions

Rebalancing the portfolio makes serious sense only because of the dynamic nature of the economy. Talking about the current situation of the country, inflation is peaking high and the probability of entering into recession is also increasing. However, Indian stock markets are still doing great in comparison to other countries.

It becomes necessary to consider current economic situations and analyse the industries which are going to affect favourably and adversely. Indexes or stocks have given better returns in the past at that time of economic conditions, however, current economic conditions might have changed and affected a few stocks permanently.

Government regulations

Keep your eye on government regulations about the industries regularly, these regulations might have a significant impact on your returns as well. A strict action made by the government could adversely affect the companies and hence, reduce their net profits. Ultimately, your returns as well.

On the contrary, government assistance, like PLI (production-linked incentive), gave industries a boost. Such an initiative made by the government might help your investment, giving you handsome returns in the future. Their historical performance might not be as good as it will be in the future.

There are various other points that might be necessary for expected returns on your investment. These three points are the top priority, besides the historical performance of the investment avenue, such as the market of the industry, emerging technologies, and companies that are taking their first step to adopting such technologies.

If you are investing through a fund, your fund manager plays an important role in their background and achievements. The type of fund and your risk appetite is an essential aspect to decide before actually making an investment.

Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com

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First Published: 15 Dec 2022, 11:28 AM IST