What Matters in Mutual Funds? Consistency or Returns?

Do you face the dilemma between consistent returns and high profits while choosing a mutual fund? High returns might be tempting, but volatile markets can give you sleepless nights, which makes consistency more important.

Here, we have discussed why consistency matters more than high returns for investors.

Why Consistency Matters More Than Just High Returns

High returns can be exciting. But when you’re on a mission to create long-term wealth through equity mutual funds, being consistent defines disciplined behaviour.

Predictable Wealth Creation

It takes time and patience to build wealth. A consistent approach to investing in the stock market helps you grow your portfolio steadily, even when markets are turbulent. This helps you plan your long-term goals, like buying a home or funding retirement.

Mutual funds that deliver high returns or often swing sharply may look appealing for quick profits. However, they might shine in bull runs, but underperform during corrections. Being consistent with your SIPs can help you survive several recession cycles as equity funds perform better in the long run.

Let’s evaluate a situation where two investors, A and B, start SIPs of INR 5,000 per month. Both remain invested for 10 years each. However, A continues to invest even during bear runs. However, B pauses the SIPs whenever the market falls.

After 10 years, A enjoyed the benefits of compounding, but B missed out on the advantages of buying more when prices drop.

Better Risk Management

Experienced fund managers manage portfolios carefully to reduce risks and maintain steady performance. These funds focus on both growth and protection.

Take the instance of hybrid mutual funds, which diversify your assets across sectors. In the process, consistent SIPs prepare your funds to handle both bull and bear phases efficiently. The best strategy is to cushion volatility while keeping your growth moderate.

Compounding Returns for SIP Investors

Consistency is the ideal strategy for SIP investors as they benefit from rupee cost averaging. When you’re regular with your mutual fund investment, compounding becomes more predictable over time.

Short-term dips in the market shouldn’t bother you as long as you put your money regularly into the fund. Over time, a smoother growth in your portfolio makes your investing experience stress-free.

The Psychology Behind Consistent Investing

Do you think that investing is just about numbers? The investment mindset is equally relevant. Volatility in the market often leads to emotional reactions. You feel the fear during downturns, and greed takes over during rallies.

These emotions often force investors to act on impulses. They chase short-term gains or sell off too early. However, with a consistent approach through SIPs, you can maintain discipline and keep emotional decision-making at bay.

Concepts from behavioural finance, like loss aversion and anchoring, explain why many investors tend to deviate from their plans. However, when you ignore noise in the short term and invest steadily, your mind remains focused on long-term wealth creation.

How to Evaluate Consistency While Investing in Mutual Funds?

How can you tell if a fund is performing consistently? Here are a few reliable indicators in this section.

1. Rolling Returns

Don’t simply judge a mutual fund by its one-year returns. Instead, look at their overlapping returns over multiple years. This approach will help you understand how the fund performed across different time frames.

2. Performance Across Market Cycles

Check whether the fund performed well in both bull and bear runs.

3. Risk Ratios

Metrics like the Sharpe ratio and standard deviation should give you an idea of how efficiently a fund generates returns, considering the risk it takes.

You should also compare the performance of a fund against its benchmark index.

Are Returns Important?

There’s no denying that returns matter to investors. These values reflect the growth potential of a fund and finally influence your investment decision. However, returns shouldn’t be the only parameter to consider.

If you’re investing in pure equity, short-term returns may be high. But with this comes greater volatility and risk. On the contrary, hybrid funds are more balanced and involve less risk. Ultimately, you need a holistic approach as you evaluate your returns along with consistency and cost-efficiency.

Tips on Building a Consistent Portfolio, Ensuring Returns

So far, we have discussed why being consistent with your SIPs is crucial. However, how do you apply this consistency to your mutual fund investment strategy? Here’s how you can keep your portfolio steady through different market cycles and ensure stable returns.

Diversify across categories

Are you solely investing in equity funds? A comprehensive approach to building wealth requires you to mix up equity, debt, and hybrid funds that balance growth and stability.

Use SIPs for discipline

Be regular with your SIP contributions. When you put in your funds regardless of market conditions, you benefit from long-term compounding and rupee cost averaging.

Rebalance annually

Review your portfolio once a year and rebalance your holdings. Make sure your growth trajectory is on track, and you hold the appropriate asset allocation.

When you remain consistent with your investment, timing the market shouldn’t worry you.

Conclusion

Investors looking to build steady and lasting wealth through compounding prioritise consistency. Let’s not deny that returns are vital. However, high returns that perish in volatile markets won’t work for you.

So, when you choose your mutual fund, consider stability and discipline. Stay consistent with your investment, and let compounding do the rest.

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