Selecting a mutual fund may seem easier today, but choosing the right one remains a challenge for many investors. Often investors evaluate investing in mutual funds based on only one metric – Past Returns. In Episode 3 of Building Bharat’s Wealth Mindfully, Nilesh D Naik, Head of Investment Products at Share.Market (PhonePe Wealth), explains why this approach can be misleading and what investors should focus on instead.
Why Past Returns Can Be Misleading
One of the most common mistakes investors make is selecting funds based purely on past performance.
As Naik highlights, studies show that there is almost no correlation between a fund’s past returns and its future performance. Funds that rank at the top over one period may not maintain that position in the next.
- This often leads to poor timing decisions:
- Investors enter after seeing strong past performance
- Exit when performance declines
Over time, this behavior creates a gap between the fund’s returns and actual investor returns. In some cases, this gap can be significant.
What Investors Should Look At Instead
Rather than focusing on short-term returns, Naik emphasises evaluating a fund more holistically.
- A few important aspects include:
- The fund manager and investment team
- The investment philosophy or style
- The consistency of performance over time
- The risk level of the fund
Every fund manager follows a distinct style. Some focus on quality businesses, others on value opportunities, and some on momentum. Understanding this style is important because it influences how the fund performs across market cycles.
Consistency also plays a key role. Instead of looking at point-to-point returns, it is more useful to assess how a fund performs across different time periods.
Understanding CRISP: Simplifying Fund Selection
To make fund evaluation easier, PhonePe Wealth has launched CRISP, a proprietary framework developed to simplify complex investment concepts.
- Consistency
- Risk
- Investment Style of Portfolio
This framework evaluates funds across these three dimensions and presents them in a simple format. Instead of analyzing complex metrics, investors can understand whether a fund ranks high, medium, or low on consistency, whether its risk is within an acceptable range, and what investment style it follows.
By simplifying these factors, CRISP helps investors make more informed decisions without needing deep technical knowledge.
The Role of Diversification in Portfolio Building
Diversification is a fundamental principle in investing, but it is often misunderstood.
As Naik explains, diversification is not about maximizing returns. Its primary purpose is to reduce risk and maintain balance in a portfolio.
Diversification can happen at multiple levels:
- Across stocks and sectors within a fund
- Across different fund categories
- Across investment styles such as quality, value, and momentum
- Across time through systematic investing
A well-diversified portfolio ensures that performance does not depend on a single strategy or market condition.
How Many Funds Are Enough?
Another common challenge investors face is how many funds they should hold.
According to Naik, both extremes should be avoided. Having too many funds can make the portfolio difficult to manage, while too few may limit diversification.
- Three to four core equity funds are sufficient for long-term investing
- A broader portfolio, including other asset classes, may have up to seven or eight funds
- The goal is to maintain balance without overcomplicating the portfolio.
Start with Risk, Not Returns
A key insight from the conversation is that investing should always begin with understanding risk, not chasing returns.
Naik suggests a simple way to think about this. Equity markets can experience significant declines over time. Investors should assess how much of a decline they are comfortable with and build their portfolio accordingly.
Once the risk level is defined, returns can then be optimized within that framework. Starting with return expectations instead often leads to poor decisions.
A Simple Approach for Beginners
For those starting their investment journey, the focus should remain on simplicity and discipline.
Begin with core categories such as large-cap, index, or flexi-cap funds. Avoid jumping directly into higher-risk segments. Most importantly, approach investing with a long-term mindset.
As Naik puts it, investing is not about quick gains. It is a gradual process that requires patience and consistency. Reacting to short-term market movements or frequently changing strategies can disrupt long-term outcomes.
- Choosing the right mutual fund is not about picking the top performer. It is about understanding consistency, risk, and investment style, and building a portfolio that aligns with your goals.
- Over time, disciplined investing and thoughtful selection create stronger outcomes than chasing short-term trends.
Catch the full conversation with Naik in Episode 3 | Building Bharat’s Wealth Mindfully.
Disclaimer: This article is from the Brand Desk. User discretion is advised.
