Everybody that has invested in Mutual Funds, has gone through the process of narrowing down on the mutual funds they would want to invest in. Now there are 20 plus mutual fund companies and all of them have 10 to 20 plus equity mutual fund schemes to offer. So how do investors make the choice of which scheme to finally invest in?
The most common way for most people to choose a mutual fund is:
1) By recommendation of some friend or family who says, this scheme XYZ I invested in has given me returns of 20% p.a. so far and hence you follow the same scheme
2) Researching yourself by going on websites like moneycontrol, where an investor will see past returns for 1 year, 3 year, 5 years or even 10 years and investing in funds that have provided the highest returns. More sophisticated investors would also look at XIRR if SIPs are done instead of looking at annual one time investment returns
3) Based on recommendation of your mutual fund distributor, who would also recommend based on factors discussed in point no.2 or based on the commission he is getting. Now because markets are at a high, even schemes with high commissions are providing good returns and hence becoming an easier sell
It makes sense to look at past data and invest, even though there is no guarantee of future performance based on past trends. The issue here is, returns are being calculated basis taking today’s NAV as the common factor. Since we are in a bull run, all indices are at close to their all time highs. Due to this, all MFs will show giving excellent returns whether it be XIRR or annual one time investment returns.
What is not evident is the risk some mutual funds carry of providing lower returns for extended time periods. To take an example, as on 10-07-2024, Motilal Oswal midcap fund has provided the highest 3 year annual returns of 40.56% in midcap category and for 5 years it has provided 33.71% annual returns which is second best in the category. This would warrant an investment in the Motilal Oswal midcap fund based on past 5 years performance.
If we go a little behind and look at returns from 2015 to 2020, the picture changes a little. The table below provides XIRR for different periods if monthly SIPs were started from January 2015 upto December 2020.
MF Scheme | 2015 - 2020 | 2015 - 2019 | 2015 - 2018 | 2015 - 2017 | 2015 - 2016 |
Motilal Oswal Midcap Fund | 9.6% | 7.6% | 5.8% | 18.7% | 7.0% |
NIFTY | 12.3% | 10.1% | 9.3% | 13.0% | -0.5% |
BSE Midcap Index | 10.2% | 4.9% | 8.6% | 26.3% | 7.5% |
Source: AMFI, Shwealth data analysis
Note: The funds shown here are just taken for illustration purpose and in no way are recommendation for investment
As can be seen, the BSE Midcap index has consistently beaten Motilal Oswal midcap scheme returns except for the period 2015-2019. Even Nifty provided better returns than Motilal Oswal midcap fund from 2015-18, 2015-19 and 2015-2020. Now, 2015 to 2020 is a long period i.e. 6 years, for which even investment in the Nifty index would have provided better returns. In the same period we analyzed 7 other midcap funds and midcap funds of Axis, Kotak, Nippon, HDFC have shown better performance in this period than Motilal Oswal midcap fund.
I am not saying that Motilal Oswal midcap fund is not an attractive investment vis-à-vis the other funds that have outperformed in the same period. An investor needs to look at more historical data points and also his objective and time horizon of investment before deciding on which mutual fund to invest in, rather than only looking at historical returns based on current NAV.
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