Do you have a 'hot tip' fund manager?

MOST retail investors track the performance of their mutual funds by looking at just one thing: returns.

They lay too much emphasis on ‘investment performance history’ when selecting an advisor. They are influenced by television channels, which announce the 'fund of the week' and the 'fund of the month'. Don't be surprised if suddenly you find television programmes calculating the NAV of a fund at 2 pm and ranking intra-day funds!

On the other hand, professional investors know that raw performance history may have little or no bearing on a fund's or manager's future prospects.

Although performance history is certainly useful in rating your investment manager's credentials, it should not be used in isolation. To borrow a Peter Lynch phrase, this is the equivalent of driving by looking only in the rear view mirror.

What you should not ignore

Most investors tend to forget the risk your fund manager took to get you that return. How many sleepless nights did your fund manager have in the process? So, the bigger fund performance analysers would look at 'risk adjusted returns', rather than just raw returns.

When I say fund manager, I am referring to a fund house and not the individual who is named as the manager for the scheme that you have invested in.