The pitfalls of investing based on past performance.

By July 9, 2012 October 30th, 2014 Blog

Mr. Harish Rao: I have taken two scenarios: An investor looks at performance for a 5 year period (from Jan 2000 through Dec 2004) and then decides to invest in the start of a new bull market from Jan 2005.

Also I have seen what sort of a performance did the really good performers in the period Jan 2005 – June 2011 have in the previous five years.

In the third slide, I have tried to highlight the peril of chasing a fad (however good performing). I have considered Reliance Diversified Power Fund. Most of the inflows came on the back of strong performance and then stayed to suffer a down turn. I also use this slide to recommend against thematic and sectoral funds.

The Research is conducted by Mr. Harish Rao, Money Management Coach, Simple Equation, Bangalore.




Mr. Gerard Colaco: Your research confirms the extremely temporary nature of chasing returns. In fact if the relative performance positions of various funds are viewed from one decade to the next, the contrast is even more stark.
Your third slide about the Reliance Diversified Power Sector Fund is particularly illuminating. Not only is it a good argument against chasing performance and the danger of investing in thematic/sector funds, it also reveals the problem posed by sharply differing quantum of AUM of the same fund at different times.
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