Reasons Why Outperforming Mutual Funds Are Not A Safe Investment?
What do you look for when investing in mutual funds?
Most investors look for the track record of the fund in ‘outperforming’ the benchmark index. However, investors may be committing a massive blunder by fleeing from recent losers and flocking to winners, primarily if they act on relatively short-term results.
The ‘outperforming’ metric of a fund is based on the records of the investment portfolio over time, compared with its peer’s performance or the benchmark index. Since it is vital in creating a diverse and secure investment portfolio, it only makes sense to learn the ins and outs of trying to outperform.
As an investor, it is natural to look at the past performance of the product before investing money. And, there is nothing wrong with it. However, the problem arises when one tries to capitalise only in such funds.
The market comprises of several kinds of investment products, which follow a particular growth plan – few are momentum-driven, whereas some are value-focused. To create a diversified investment portfolio, one needs to identify the types and features of funds to develop the right set.
An alternate way to deal with fund management would mean a different trajectory of returns. Moreover, it is in this context that trying to look for out performers every time is not necessarily in the interest of the investor. Ideally, an investor should have a blend of different mandates so that they complement each other, ultimately reducing the market risk of volatility and uncertainty.
Mutual Funds Are Subjected To Market Risks
While it is a fact that mutual fund is a good investment option, one shouldn’t forget that they come with an inherent market risk associated with it. For instance, when the economic bubble blew up, the stock market underwent a nosedive, putting investors in a panic mode. Hence, it is safe to say that laying all your eggs in one basket may lead to a disruption in the investment goal. It can be said that trying to invest only in outperforming mutual funds is not going to work in one’s favour.
While investing, one needs to understand that most investments are susceptible to market risks and will at some point or the other fall. In such a situation, following the relative stock price movements of 50-500 stocks is of utmost importance.
Understanding The Implication Of Stock Price Movement
A benchmark index can comprise of 50-500 stocks, and numerous variables lead each company’s stock price movement. In this case, it can be quite a task to track the progress of these variable factors and the impact these elements are going to have on the price, and invest accordingly.
It is the pressure to outperform that hampers the momentum of many investment portfolios. However, in the ever-fluctuating market, reasons and facts are often ignored by greed. Amid such a scenario, the portfolio that takes the maximum risk appears to gain the most returns. In any case, this doesn’t last. If an investor has all investments in similar kind of products, then, by all means, they will all rise and fall together. Whereas, if the investor opts for a mix of diversified products, odds are these products would help bring out the maximum return.
We feel that the best approach to deal with this anxiety is to put resources into a set of useful products (rather than the best), every one of which is unique as compared to the other. Along these lines, the instability of the portfolio would reduce. In such a situation, the main thing to do is to corroborate in order to mitigate the risks intermittently.