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Are you chasing returns? Focus on goals instead

Tell anyone that you have invested in mutual funds, and the first question that they are most likely to ask is how they are performing, i.e. what are the returns.  Returns are the first and probably the last thing on many investor’s minds.

Chasing mutual funds returns

But chasing returns is not a healthy option. Investing in a fund because it tops the charts of one-year returns is a wrong way to look at investing in general. It is seen that many investors keep jumping from one fund to another based on one year’s return. While they may presume that it will help them to build greater wealth, but in reality, it is detrimental to their financial health. Investors forget to take into account the cost and taxation associated with exiting from one fund and investing in another.  Also, the ranking of the top-performing funds keeps on changing regularly.

Chasing top-performing asset class

The scenario is not just limited to mutual fund investment. Investors also look at the current top-performing asset classes. These asset classes may include gold, real estate etc. Thinking that they will miss a rally, investors invest in a specific asset. But they are most likely to get the timing wrong and invest when the prices are at the highest. Stagnant or falling prices disappoint investors, and soon, they exit the asset class and invest in another investment product. 

As a result, investors fail to build wealth over time. The right approach would be to focus on financial goals rather than chasing after returns. It may not sound exciting, but investing is not supposed to be exciting.

Focus on the goals

Staying focused on your goals can help you to achieve your goals. Whether it short term goals or long term goals, it is essential to stay focused. Knowing the timeline of your goals and investing in appropriate funds will help you to stay focused and achieve your goals with ease. E.g. if you have a goal of buying a house in 10 years, then chasing the funds based on the current returns is not the right approach. Also, if your goal is to save for a vacation in 6 months, looking at the 1-year return will still not make sense. It is because, in this case, your objective should be to protect your capital rather than focussing on returns. Hence, the importance of focusing on goals far outweigh the compulsive tendency to look for better returns. 

Moreover, in the case of equity funds, one-year returns are not adequate to judge the performance of the funds. One should only invest in equity funds if they have a time horizon of five years or more.

Our financial goals are similar to our career goals. To achieve our goal of working in our dream company or setting up a business requires discipline. The image of the end goal is what keeps us motivated, and distractions do not stand a chance. Investing is no different. It is the discipline and focus that count and makes dreams a reality.