Why blindly trusting past returns can hurt your SIP in mutual funds?

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Many investors start an SIP in mutual funds by looking at past returns. If a fund has done well in the past five or ten years, they assume it will continue to give similar returns. This is a very common approach. But it can also be a big mistake. Past performance can help you understand how a fund has done in the past, but it does not tell you how it will do in the future.

Let’s explore why blindly following past returns can hurt your SIP plan and what you should really look at when choosing a fund.

Past returns are not guaranteed

One of the biggest misunderstandings among investors is the idea that a fund that gave high returns in the past will keep doing the same. But mutual fund returns change due to many factors, such as the market, the economy, interest rates, global events, and more.

Just because a fund delivered 13% return in the last 5 years does not mean it will give 15% in the next 5 years as well. In fact, many top-performing funds in one year often do not stay on top in the next. This is why it’s risky to pick an SIP plan only based on its past returns.

Fund managers and strategies can change

When you look at a fund’s past performance, remember that the person managing the fund might have changed. A new fund manager may follow a different investment style or strategy. This can change how the fund performs going forward.

Also, sometimes a fund does well in a specific market condition. For example, a fund focused on technology stocks may have done very well when tech was booming. But if market conditions change, the same fund may not do well anymore. So, the past return was based on a specific time and may not apply to the future.

*Please note that the reference to any industry/sector is not to be construed as a research report or a recommendation to buy or sell any security in that industry or sector.

Market cycles affect returns

Markets go through cycles — ups and downs. A fund that performed well during a bull market (when the market is rising) may not do well in a bear market (when the market is falling). If you only look at returns from a rising market, you won’t see how the fund performs when things go wrong.

For SIP in mutual funds, long-term consistency matters more than short bursts of high returns. A suitable fund is one that can handle both good and bad market phases well. This may not always show up in recent past returns.

What you should look at instead

Instead of only focusing on past returns, here are some better ways to evaluate a SIP plan:

Fund consistency

Look at how the fund has performed over different time periods: 1 year, 3 years, 5 years, and during market crashes. A fund that gives steady returns in both good and bad times is relatively better than one that gives very high returns in good times and crashes during bad times.

Risk profile

Check how much risk the fund takes to deliver returns. Some funds take high risk, which may not be suitable for every investor. If you are investing through an SIP in mutual funds for long-term goals like retirement or a child’s education, you may want funds with balanced risk.

Expense ratio

The expense ratio is the fee the fund charges to manage your money. A high expense ratio eats into your returns. Compare similar funds and check if you are paying too much. Lower cost funds may give better long-term results, especially in SIP plans.

Fund manager’s track record

Research the fund manager’s history, not just in the current fund, but also in other funds they’ve managed. A suitable manager with a stable approach adds long-term value.

Portfolio quality

See where the fund is investing. Are the stocks or bonds in quality companies? Are they diversified across different sectors? A suitable and balanced portfolio can handle market ups and downs better.

SIP works well with discipline, not chasing returns

One of the biggest advantages of an SIP in mutual funds is that it builds the habit of regular investing. You invest a fixed amount every month, which helps you average out the cost over time. This is known as rupee cost averaging.

But this benefit is lost if you keep switching funds based on past returns. Jumping from one fund to another because it did well last year often leads to poor long-term results. It breaks the compounding process and makes your SIP less effective.

Conclusion

Past returns are not useless – they can give you a general idea of a fund’s history. But they should never be the only thing you look at when picking an SIP plan. Focus on quality, consistency, and how the fund fits your goals and risk comfort.

SIP in mutual funds can be a suitable way to build wealth over time, but only if you choose your funds carefully and stay patient. Avoid the trap of chasing yesterday’s winners. Instead, build a strategy that works for the long run.