FOMO investing in mutual funds: Why chasing the herd can hurt your returns

A growing number of retail investors are falling prey to FOMO — the fear of missing out — when investing in mutual funds. Triggered by social media hype, recent top-performing schemes, or newly launched New Fund Offers (NFOs), many investors rush in, hoping not to “miss the bus.”

But experts caution that this herd mentality often leads to disappointing outcomes.

“FOMO is a powerful emotional trigger. It can push people into decisions without proper due diligence,” said Rajani Tandale, Senior Vice President, Mutual Fund at 1 Finance.

The FOMO trap: Trending schemes, poor returns

The appeal of hot-performing funds is strong. Yet data shows that yesterday’s stars often fade.

“Funds that ranked in the Top 10 during 2015–2017 slid to ranks 50–100 by 2018–2020, and many even exited the Top 100 by 2022–2025,” Tandale noted.

One striking example: a fund that held the #1 rank crashed to #256 in just five years, according to 1 Finance Magazine Research.

Sectoral and thematic hype

In 2024 alone, mutual funds in India launched a record 239 NFOs, raising ₹1.18 trillion. Thematic and sectoral funds accounted for nearly 74% of NFO inflows by August 2024, reflecting a growing appetite for niche themes.

But the excitement doesn’t always translate into steady gains. The Nifty Media Index, for example, soared 58% in four years, only to fall 47.5% over the next seven — delivering flat returns over an 11-year period.

“Nearly 50% of sectoral and thematic funds failed to outperform the Nifty 500 index over a five-year horizon,” Tandale said, highlighting the risk of chasing themes over fundamentals.

Illusion of diversification

Another side effect of FOMO is over-diversification. Many investors keep adding new schemes in fear of missing out on the next big thing. But this often leads to clutter.

“Nearly 65% of mutual fund assets are concentrated in the same top 50–100 stocks, regardless of how many schemes you own,” said Tandale.

This makes diversification redundant and performance harder to monitor.

High expense ratios of small AUM funds — up to 2.25% — add to the problem.

These funds are often marketed aggressively during bull runs, pushing investors into NFOs even when existing options are more reliable.

How to avoid the FOMO trap?

Tandale shares key steps to build a resilient mutual fund portfolio:

• Avoid chasing last year’s winners, especially in sectoral or thematic categories. Past performance is not a guarantee of future returns.
• Diversify smartly, not excessively. Consider flexicap funds, which allow fund managers to adjust allocations based on market cycles.
• Focus on long-term consistent performers with risk-adjusted returns over 7–10 years.
• Prefer low-cost index funds, which are increasingly outperforming active funds globally. In the U.S., index investing accounts for over 60% of mutual fund assets.
• Cut down portfolio clutter. Fewer schemes are easier to track and manage.
• Seek advice from unbiased financial planners, not sales-driven intermediaries.