Dont Judge a mutual fund by its Short Term Performance

“Dont judge a person by their Sunday appearance” applies to Mutual funds also . Best Mutual funds are the best over most the time frame and Worst mutual funds are the worst performers in most of the time frame . What I mean by this is that the best performers return wise in 5 yrs , 3 yr and 1 yr are almost at top and worst performer are always in the bottom for 5 yr , 3 yr and 1 yr time frame .. let look at the Chart of mutual funds performance

I compiled a list of 78 top mutual funds on the basis of 5 yrs Return and plotted a graph of returns for 5 yrs , 3 yrs and 1 yrs for them . To smooth out the data , I took a 10 period moving average (ie . i took average of Top 10 , then average of 1-11 , then 2-12 … ). Just want to see what is the pattern of Mutual funds list . Have a look below .

Source : Valuereserchonline.com

If you look at the chart above , you will see that the Best performers (Top 10) were in the best performers for 3 yrs and 1 yrs time frame also . And at the same time the worst performers in 5 yrs time frame were the worst performers in 3 yrs and 1 yrs time frame , where as the opposite was not true .. See this video post on how to choose a good mutual fund for yourself ?

Here are the Learning’s and conclusions

Do not judge a mutual funds by its short term Performance like 1 yr

There were many mutual funds who gave top returns in 1 yrs time frame (See the orange Line , see all the top positions) , but not all of them were the best in 5 yrs time frame. same thing happened with 3 yrs time frame , There were 2-3 mutual funds at the top in 3 yrs time frame but they were not best in 5 yrs time frame . See why SIP works well in long term

Short term performance does not give enough indication of Long term

This is common sense , Just like meeting a person for few hrs or days cannot tell us about his/her nature or behaviour , the same way a mutual fund cant give good indication of its long term perspective from short term performance. In the above chart you can see that if i gave you just one year performance chart and it was sorted by returns , you could never tell which amongst the top would also be at top in 5 yrs time frame .

Bad performance in short term should not be taken too seriously

This is kind of same thing which i said above , but lets see it with different perspective .. Short term performance should not be the only reason for selling your mutual fund or Shares , We generally take our decisions based on short term performance , that is true for Life also . We need patience and give time to our investments to show its true colors . Good investments happen by giving time to your investments and Early Investing , not just by choosing one .

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Tagged as: must-read, Mutual Funds, myths