Winner takes all? Mutual funds

If you read magazines, newspapers, etc. or watch the business channels you would have been convinced that people chase performance. However when I recently ran a screen on the best mutual funds over the past 3 years, I found something interesting. The fund returns (on an annualised basis) was 33.07%, 31.30%, 30.79%, 30.42%, and 29.66%.

Frankly what I am trying to say is you should not believe that old adage “Winner takes all”. Actually winner does not take all. In the long run whether you were in the fund which gave 33.07% or 31.30% for a period of 3 years, the overall money that you made would not have changed much. Also next quarter if both these funds gave (say) a return of 3% and 6% respectively the over all return figure may still be favoring the fund which got 33.07% over a longer period (!).

Thus those of you (or us) who keep shuffling funds or schemes should realize that sitting tight without worrying about returns over 1-3 quarters might be far, far better off than those who keep churning. Elsewhere I have called it a “rating trap” – which is helping on the rating company!!

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