Understanding mutual fund returns
When it comes to mutual fund returns, two things are true for most mutual fund investors:
It is the most important thing for them
It is among the least understood set of concepts
An advisor may talk about all the nuances of mutual fund investments to an investor – risk mitigation, balancing, diversification, down-side protection etc – but at the end of the day, the person would only care about how much he/she would end up making.
And yet, when it comes to reading and understanding returns, they could make elementary mistakes. For example, once when I recommended an investor invest in a scheme for 5 years for optimal benefit, he said he would invest in it for a year, because “the fund has better 1-year return than 5-year return” – obviously going by the most recent numbers.
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