Mutual fund investors often begin with a clear target. It could be building a retirement corpus, funding a child’s education or simply earning returns that stay ahead of inflation.
However, that target can change when investors start comparing their fund with another scheme that has delivered higher returns.
Radhika Gupta, managing director and chief executive officer of Edelweiss Mutual Fund, highlighted this behaviour in a post on X. “Most investors start with an absolute goal,” she wrote, giving examples such as “I need 10 per cent returns” or “I need my money to beat inflation and grow.”
The problem, she said, starts when the existing fund is delivering as expected but a newer or better-performing fund catches the investor’s attention.
“The fund delivers what it promised. The goal is on track. But a newer, hotter fund appears. It made more,” Gupta said.
That is when an investor can move from asking “Is my investment helping me reach my goal?” to “Why am I not earning what that other fund earned?”
Absolute returns become relative returns
This shift may appear harmless, but it can lead to frequent switching.
An investor may exit an existing mutual fund simply because another scheme has generated higher returns over the past year or two. However, the two funds may have very different portfolios, investment strategies and levels of risk.
Gupta summed up the behavioural shift in two words: “Absolute becomes relative.”
The danger is that the investor starts chasing the latest winner without knowing whether the factors that drove its recent performance will continue.
For example, a fund that benefited from a strong rally in a particular sector or market segment may have delivered exceptional returns. That does not automatically mean it will remain the best-performing choice after the market cycle changes.
Higher returns are not always a free lunch
This does not mean investors should ignore poor performance. A fund consistently underperforming its benchmark or peers, particularly when there is no clear reason for the underperformance, deserves closer examination.
But Gupta argues that unusually high returns should also prompt questions.
“In investing, performance matters. Too little performance is a problem. But too much performance should also make you ask questions,” she wrote.
The reason is simple: higher returns can come with higher risk. A fund taking larger bets, investing heavily in volatile segments or benefiting from a particular market trend may generate strong returns for a period, but the same strategy can also lead to sharper falls.
“Because in markets, there is rarely a free lunch,” Gupta wrote. “Extraordinary returns often come with extraordinary risks, sometimes visible, sometimes hidden.”
For investors, therefore, returns should be assessed alongside factors such as:
the fund’s investment strategy;
portfolio concentration;
risk and volatility;
performance across different market cycles;
consistency against the appropriate benchmark; and
whether the fund still fits the investor’s financial goal.
Why switching frequently can hurt
Every switch creates the possibility of making a timing mistake. An investor may sell after a period of weak performance, only for the fund to recover later. At the same time, the fund they switch into may have already enjoyed much of its recent rally.
This creates a familiar pattern of buying after strong performance and selling after disappointing performance.
Frequent switching can also disrupt a long-term investment strategy. A retirement investor, for instance, does not necessarily need the fund that tops the performance chart every year. What matters more is whether the overall portfolio has a reasonable chance of reaching the required corpus within the available time.
Gupta also pointed to a wider consequence of return chasing. As investors move money towards recent winners, fund managers can face pressure to keep up. “Risks get stretched. Portfolios become more aggressive. Everyone chases the latest winner,” she wrote.
What should mutual fund investors do?
Investors should not interpret this as a message to blindly stay invested regardless of performance. A fund can become unsuitable because of persistent underperformance, a change in its strategy, excessive risk or a mismatch with the investor’s objective.
The important point is why you are switching.
Before moving money from one fund to another, ask:
Has my financial goal or time horizon changed?
Has the fund’s investment strategy changed?
Is the underperformance persistent rather than temporary?
Am I moving because the new fund fits my portfolio better, or simply because it recently delivered higher returns?
Does the new fund carry significantly more risk?
“The best investing (sic) is not about finding the fund that wins every year,” Gupta wrote. It is about choosing an approach that can get you towards your goal and having the discipline to stick with it.
“The biggest wealth destroyer is often not poor performance. It’s the constant search for better performance,” she said.