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Be Cautious With Top Funds

Funds on top now, may not be the best for you

People looking to invest in funds that have climbed to the top-of-the-charts during the recent market rally need to be very cautious about what they do, because all that shines is not really gold out there.

With stock markets showing no signs of fatigue, barring a blip or two, mutual funds (MF) are also turning in double-digit gains. While that is a position that all investors would like their money to be in, yet that is not always possible. Read on to find out what leads some investors astray during a market rally.

On an average, an equity diversified fund has delivered a return of 14.12 per cent for the month of April 2009. This is one of the best monthly gains by equity diversified funds since January 2004. The best fund (JM Basic) has reported a noteworthy gain of around 25 per cent.

If you had invested in this fund a month or so ago you could have earned Rs 25 for every Rs 100 invested. Who would not like to get such returns?

But hold on, as Value Research always underlines , investing should be a long-term process and while investing, one should always choose consistent performers and not really be swayed by performances that the best-of-the-month funds, across categories, are notching up. They can be traps that investors may well see their money disappear into. Why? Because, the fund that is currently at the top may not be among the consistently performing ones. In fact, it may be doing well now, but across a certain long-term timeframe it may be a laggard – sort of a tortoise and hare story.

Also, the performance of these top funds is dependent to a large degree on how well the market performs, about which no one can foretell anything. And, as no one is sure how long this bull rally is going to last, they may not protect the interest of investors in a falling market.

To explain what we are saying, we took the ten funds that are currently on top and looked back into their performances during 2008.

The data throws up revelation after revelation. None of these funds were even in the top quartile of fund in 2008. In fact barring Canara Robeco Equity Diversified Fund and ICICI Prudential Discovery Fund, none of the funds were even in the first half of the category.

While selecting mutual funds, as in other facets of life, a sound ability to sift wheat from the chaff is required. Plus, the ability and the patience to resist the temptation to chase short-term windfalls.

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Contradictory Gains
  Returns    Rank  
Fund Name  1-Month*  Year 2008  1-Month*  Year 2008
JM Basic 24.77 -75.71 1 191
Principal Junior Cap 24.51 -64.26 2 173
Canara Robeco Emerging Equities 24.09 -66.06 3 179
JM Small & Mid-Cap Reg 23.23 -79.14 4 192
Magnum Emerging Businesses 23.04 -68.54 5 185
ICICI Prudential Discovery 20.75 -54.56 6 92
DBS Chola Opportunities 20.36 -60.02 7 153
Canara Robeco Equity Diversified 20.34 -50.84 8 58
Magnum Midcap 19.88 -71.74 9 187
JM Emerging Leaders 19.85 -80.36 10 193
*One-month period ends Apr 30, 2009