New Delhi: Many new investors are so attracted by today’s high returns in the short term that they make their investment decisions based on these recent returns. They may have forgotten or are not aware that a fund has to go through a few cycles to gauge its performance.
A fund’s performance is expressed as a percentage over several different time periods, such as one month, three months, six months, one year, three years, five years, 10 years and since the fund’s inception.
Experts agree that the past performance of a fund is very important and gives a bird’s eye view of how the fund has performed in various market cycles.
But what should be the minimum average time period while assessing a plan?
“Investors should give a time frame of at least five years to a pure equity fund to see how the fund is performing, whether it is meeting the mandate or not. If it is a value-oriented fund, then you definitely do not expect returns in the short term. Value is a very cyclical strategy which is going to give you returns over the long term,” said Rishabh Desai, Founder, Rupee with Rush Investment Services.
There may be some strategic bets for the short term, for example, regional or thematic, but investors should be aware of when and when to exit a plan.
If a scheme does not have a track record of five years, investors can look at the fund house and invest if they trust the fund manager. “For new topics or strategies, it is advisable to first see how the fund is performing and allow it to establish a track record before investing,” Desai said.
Investors should note that fund managers themselves make active bets in buying and selling stocks. Hence, it may be a bad idea for investors to actively bet on mutual funds considering the short term returns of the schemes.
However, index funds may be outliers in this scenario, as the stocks of these funds remain stable for some time and are rebalanced every quarter.
Taxes are another factor you should consider if you are churning your funds based on short-term returns. Equity funds are taxed at the rate of 15% plus 4% cess if the units are sold before one year. Long term capital gains tax in equity funds is 10% + 4% cess provided the profit is exhausted in a financial year 1 Lac. long term capital gains up to 1 lakh is tax free.
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