(This column was first published on Value Research Online.)
Human beings are broken records. Okay, we’re not actually broken records, but most of us definitely do sound like one. In fact, anyone who knows anything about something will sound like a broken record because they won’t hesitate from repeating it again and again. I’m sure my son thinks of me as a broken record when I keep telling him to not jump on the couch, or something like that. I’m also sure we, at Value Research, sound like broken records when we keep telling investors that short-term outperformance is not a guarantee of future returns. But we can’t help but keep saying that, because it’s true.
A number of equity funds, particularly mid-cap and small-cap schemes, that had done well in 2014 are now having a rough time in 2015. Investors who would have jumped into these funds after looking that their returns over the past year or so would probably be biting their nails now. But that’s the way it is, you never know when a fund will do well or poorly, which is why you have to look at its performance over a full market cycle before you invest in it.
In fact, this is the case with not only mutual funds, but other aspects as well. Take the IPL for example. Kings XI Punjab were table-toppers last year, but ended up at the bottom rung this year. From doing hardly any wrong to being unable to do hardly any right, it was a sorry season for them in 2015. One that no one would have expected after last year’s performance. On the other hand, the Royal Challengers Bangalore were among the bottom teams last year, but have managed to clinch the 3rd spot this year. And beyond such examples are the Chennai Super Kings, who’ve been among the top 4 qualifiers in every IPL edition. That’s the nature of the game.
And so is the nature of investments. A fund at the top one year can fall to the bottom of the pack the next year. And vice versa. But there are also funds that manage to put in a good performance year after year, no matter what the markets are doing. These are the kind of funds that are usually recommended by us for their performance in bull runs as well as bear phases, which again makes us sound like broken records.
But no one wants to listen to a broken record, do they? A few actually do. They’re the ones who invest systematically in the CSK of mutual funds, and even though they might not achieve every investment goal, they’ll come close enough on most occasions. Then there are those who don’t listen to broken records and chase short-term performance of the KXIP or RCB of mutual funds. No points for guessing how often they get close to their investment goals. Hint: rarely.