Why Chasing the Highest Return Mutual Fund Can Hurt Long-Term Wealth
Introduction
I’ve seen this so many times now that it’s almost predictable.
“Which fund is producing the greatest returns?”
Genuine question. In the past, even I had the same thoughts. But after working directly with investors over time, I realised that many avoidable investing mistakes often begin with this line of thinking.
It’s natural to look at past returns but chasing the highest return mutual fund based on past performance is one of the most predictable ways to undermine long-term wealth creation.
When Logic Reverses at the Market Gate
In everyday life, our actions are quite sensible. You don’t rush to buy more when petrol prices rise. You feel happy buying at lower prices when there is a sale. However, in the stock market and mutual fund investing, this logic often reverses. When the market rises, we feel secure and invest more. When it falls, we become afraid and stop SIPs. This behaviour can be counterproductive for long-term investing.
An actual situation many investors recognise: certain categories of mutual funds performed well over a period and naturally attracted more investor attention. But when markets were weak, most people did not want to invest. They invested only after witnessing strong returns, felt uneasy during volatility, and then asked:
“Should I exit, sir?”
This is often less about the market and more about investor behaviour. The pattern rarely changes. We invest in a fund that’s doing well, it slows down the following year, a different fund rises to the top, we switch and we believe we are acting wisely.
In reality, we are chasing past performance, entering late, and interrupting compounding.
The Hidden Cost: The Behaviour Gap
Real data backs this up: AMFI data showed that 53.38 lakh SIP accounts were discontinued or completed in March, while 52.82 lakh new SIP accounts were registered during the same period. The SIP stoppage ratio rose to 100%, up from 76% in February, even as monthly SIP contributions reached a record ₹32,000 crore.
One straightforward but difficult-to-accept truth: investments with higher return potential may also come with higher volatility and uncertainty. Past performance may or may not be sustained in the future.
Most of us only see returns, not the risk attached to them. What often goes unnoticed is the hidden cost of investor behaviour, something often referred to as the “behaviour gap”. This is the difference between the returns produced by a fund and the returns actually obtained by the investor caused by late entry, early exit, or pausing investments during volatility.
Even SIP Investors Do This
SIP (Systematic Investment Plan) is designed to promote discipline. However, in reality, the pattern often looks like this:
- Market rising → SIP is started. Confidence is high.
- Market declining → SIP is paused or stopped. Fear takes over.
This can disrupt rupee cost averaging, one of the core advantages SIPs are designed to provide. Rupee cost averaging works by buying more units when prices are low and fewer when prices are high. Stopping during a fall does the exact opposite of what the strategy intends.
Trying to capture only the highest recent return can come with trade-offs that are often overlooked. In many cases, disciplined investing and consistency may matter more than trying to optimize every market move.
Ask Yourself Before Any Decision
- Does this fit my financial objectives?
- Can I manage the level of risk involved?
- Can I stay invested for the long term?
Because these factors may help investors make more suitable long-term decisions rather than simply chasing the highest recent return.
The Role of a Mutual Fund Distributor
As a Mutual Fund Distributor, our role is to help investors understand mutual fund products, scheme features, associated risks, and the importance of disciplined investing. Investor decisions should always be made based on individual financial goals, risk appetite, and investment horizon.
The goal is not to chase short-term returns, but to use a structured approach aligned with long-term goals. The attraction of higher returns is natural. However, decisions made purely on recent performance may not always produce positive results. A disciplined, goal-focused approach combined with a long-term viewpoint can be more effective in supporting long-term wealth creation.
Investor behaviour may often matter more than chasing the best recent performer.
Statutory Disclaimer: Mutual Fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.
Data Disclaimer: Data referenced in this article is based on publicly available sources including AMFI and third-party research platforms, and is for informational purposes only. This article is for informational purposes only and should not be construed as investment advice. Investors should evaluate suitability based on their financial goals, risk appetite, and consult a qualified financial professional before making investment decisions.
Note: Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. The past performance of the schemes is neither an indicator nor a guarantee of future performance.
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