Why There Is Nothing Called The Best Mutual Fund Scheme?

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A question and answer website frequently has this question under financial planning or stock markets: which is the best mutual fund scheme?

Why There Is Nothing Called The Best Mutual Fund Scheme?
In reality there is nothing called the best mutual fund scheme. The same scheme cannot give you the best returns every year. Let me explain this with an example. If say a mutual fund scheme had the largest exposure to a stock of Sun Pharma and ITC, it would have delivered fantastic returns in the last one year until March.

This is because, Sun Pharma has been the best performing stock from May 2014 until March 2015. But, in the last two months the stock has fallen almost 15 per cent as results disappointed. Ditto for ITC. Now, funds that heavily owned the stocks last year would have been among the best performing funds. On the other hand those with heavy exposure to ITC, Sun Pharma and ICICI Bank would be laggards among mutual fund schemes, because these stocks are down quite a bit in the last 3 months.

Therefore what maybe the best performing mutual fund scheme today cannot be the best performing forever. At the most one can do is study a consistent performer and buy into the scheme.

One of the largest mutual fund schemes is HDFC Equity.

It has been a consistent performer over the years. In fact, the fund manager has stayed with HDFC Mutual Fund for more than 2 decades now, which is one of the reasons why it may have been a good performer.

What investors can do is study the portfolio, study the returns in the last few years and see how they compare with benchmark indices. It is not necessary that the scheme with the largest corpus or one that has done well in the past could be the best.

Also, it depends on your risk taking capacity as well. There are many schemes which invest in the mid cap and small cap space that have done much better than the large caps. But, there is a serious risk in them in the sense they tend to fall faster than the large cap equity schemes and rise faster as well.

GoodReturns.in

Read more about: mutual funds, itc, sun pharma
Story first published: Tuesday, June 9, 2015, 10:25 [IST]
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