A Common Problem in Mutual Funds
Many people do not read the disclaimer and fall into a common trap in the mutual fund world. A wrong practice is going on where mutual fund distributors show last year’s best-performing funds and push investors to switch. This mostly affects senior citizens and people who do not have much market knowledge. They trust advice and keep changing funds again and again.
How Distributors Push Fund Switching
If an investor is in a fund that gave around 12% return, the distributor may show another fund that gave 18% return in the last year. The investor is then told to move money to that fund because returns look better. But the problem is that next year, the same fund may fall to 11%, while the earlier fund may move up to 15%. Then again, the investor is pushed to switch.
Past Top Performers Do Not Stay on Top
Data clearly shows that the fund which is number one in one year may fall very badly in later years.
A fund that was a top performer in 2014 and 2015 may go far down in ranking in the coming years. This happens with many funds. Market cycles change, and different funds perform well in different times.
Most Funds Give Average Results Over Time
Even if a fund moves from rank three to rank two, then to seven, and later to fifty or even one hundred, this is normal. Over the long term, most mutual funds end up giving near-average returns. Very few funds can beat the market year after year without a break.
Hidden Losses in Frequent Switching
When investors keep switching funds, they may lose money due to tax. Each switch can create a tax impact. Also, distributors earn higher fees when new investments are made. So frequent switching helps them more than the investor. This is why such advice should be handled carefully.
Think Long Term, Not Year to Year
The better way is to invest with a long-term view of five to seven years. Only take action if you see a serious problem, like a fund manager changing strategy in a wrong way. Switching just because another fund did better last year is not a smart move. Long-term patience usually gives better results.
