Mutual Funds: Should you opt for low-performing funds? Experts have THIS to say

When every investor is chasing high-yielding funds, there are some who chase low-performing mutual funds to make the most of the current attractive valuations. Time and again, wealth advisors have advised that historical returns are not a guarantee for a scheme's future returns. Therefore, just because a scheme has performed well in the past does not mean it will do so in the future as well. 

Alternatively, one can invest in the schemes that are performing poorly in order to capitalise on market correction.

So, when a scheme — on account of market correction — is available at an attractive valuation, one may consider investing in it and book profit at a later stage. This may not be a very tempting thing to do, but some wealth advisors still advise investors to opt for it.

Sridharan Sundaram, founder of Wealth Ladder Direct, says that investors can invest in infrastructure and information technology (IT) funds since they are available at attractive prices now. “Investors should, however, be careful to not get too high an exposure to sectoral funds,” he adds. 

Shweta Rajani, head of mutual funds, Anand Rathi Wealth, says, "When investing in mutual funds, it is important to look beyond just historical performance. Funds should not be picked based on high or low return delivery in the recent past. Instead, focus on the growth potential of the underlying investments in those funds. This is most often difficult for an investor to gauge on their own. Therefore, it becomes important for investors to opt for a diversified portfolio."

"Sectoral and thematic funds are not the category pick for every investor as they go through performance cycles and require tactical entries and exits to be made. This can make them risky for the average investor. In case an investor enters such a fund in a wrong cycle, their returns might get severely affected," she says.

Fairly priced

Some experts believe that stocks and funds are priced fairly. The equity market is reasonably valued as of now sans major froth. “Large caps have around 11 per cent EPS growth expectations and midcap and small caps have around 20 per cent growth potential in a one-year time frame. Thus, simply diversifying across categories and market caps should be the go-to starting for investors,” adds Rajani.

Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services, also echoes similar sentiments. “After a remarkable four-year bull run, the market is currently experiencing a correction. Many stocks are now available at fair valuations, prompting investors to consider mutual funds as a way to diversify their risk. Sectors that previously delivered outstanding returns—such as power, defence, railways, auto, and even FMCG — are facing significant challenges during this correction.”

"I have always emphasised the importance of investing in diversified equity mutual funds rather than sector-specific funds, which tend to be cyclical and carry higher risks. Although the Net Asset Value of these sectors is currently low, blindly investing in them is not advisable. If you have excess capital and a long-term perspective, sectors like IT, banking, pharmaceuticals, auto, and FMCG appear promising. However, consider these as satellite portfolios," she adds.