Don't Chase Returns, Chase Goals

Jayesh Manek born in Uganda in 1956, moved to the UK with his family. He initially worked as a pharmacist but harboured a passion for investing.

In the early 1990s, Manek won the Sunday Times Fantasy Fund Manager competition two years in a row, beating thousands of participants and earning significant prize money.

This caught the attention of legendary investor John Templeton, who provided Manek with seed capital. With Templeton's backing, Manek launched the Manek Growth Fund in 1997, focusing on small-cap European companies.

His Manek Growth Fund, fueled by his bold bets on small-cap European companies, delivered staggering returns, attracting millions and making him a media darling. It seemed like he could do no wrong.

But fast forward a few years, and the dot-com bubble burst and Manek's high-risk strategy backfired spectacularly. The fund's performance plummeted, leaving investors with significant losses.

Manek's story isn't an isolated incident. The allure of "winning" funds and chasing past performance is ever-present, as evidenced by the current trend of investors flocking to mid- and small-cap funds based on their recent strong returns.

Does past success guarantee future glory?

Take the example of the 2014 tax-saving funds. Nippon Tax Saver, LIC Tax Saver, and Axis Tax Saver were the star performers back then. However, their subsequent performances have been a mixed bag, highlighting the limitations of relying solely on past success. This isn't just true for tax-saving mutual funds but across categories.

This brings me to a question I often hear from clients, a question that highlights the allure of chasing past returns:

"Why aren't we investing in the top-performing funds?" or "My friend's investing in these funds with fantastic returns - why don't we switch to these?

But this fear of missing out (FOMO) is a dangerous game. Fear can make us sell our investments during market downturns, locking in losses. Greed, on the other hand, can tempt us to chase overvalued assets, leading to potential disaster. Remember, past performance is just one piece of the puzzle when it comes to making investment decisions.

Emotions play a significant role as well. When we own funds that are performing well, it feels good. However, when they underperform, we often feel it was a mistake investing in these funds. The temptation arises: should we sell these underperformers and invest in the funds that are performing well? 

This is why investor returns are often lower than the returns delivered by the fund. Take the 2017 example where small-cap and mid-cap mutual funds delivered fantastic returns of more than 50%, attracting significant inflows of money. But then, in 2018, those same funds delivered negative returns, causing many investors to panic and sell, locking in their losses.

Beyond Past Performance Shadows

If we shouldn't be chasing past performance and letting our emotions get the better of us, how should we invest? Here are some points to consider when investing:

1. Picture your future: What do you want your life to look like in 5, 10, or 20 years? Do you dream of early retirement by the beach? Planning a child's college education? Become clear on what you want out of life, then make financial decisions that align with what you want. 
2. Turn off the noise: In today's information age, it's easy to get overwhelmed by the constant stream of financial news, opinions, and predictions By tuning out the noise, you can focus on what truly matters.
3. Don't be a picky eater when it comes to your investments: Just like you wouldn't fill your thali with only dal, don't limit your investments to just one option! Diversification helps you manage risk and grab opportunities.

Now, let's apply these principles to a hot topic: mid and small-cap funds. They've delivered impressive returns in 2023, delivering around 50% returns.

Will the mid and small-cap rally continue or is it a bubble ready to pop? Share your predictions in the comments!

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Follow me, Ravi Nagrani, for more insights on personal finance and investing.