If you are one of those who often get tempted to invest in funds that are in the limelight because of their short-term performance, this one's for you.There are several pitfalls of following this strategy and it can ruin the long-term prospects of your investment portfolio.
Over the years, at different times, different categories of funds such as information technology, infrastructure, banking, midcap and, most recently, international funds have performed exceptionally well.
In fact, for a long time, new fund offerings were a craze among investors and, hence, many invested in every NFO that came their way.
No wonder, one often comes across investors who not only own a large number of funds, but also have a sizeable exposure to funds with a narrow focus.
What most investors forget is that these sectors - thematic and specialty funds - suffer from leadership shifts and changes in the business cycle from time to time.
This phenomenon explains the erratic performance of these funds. It is common to see these perform exceptionally well during certain periods, but perform inconsistently during other times.
Moreover, at times, the exceptional short-term performance of some of these funds may be a reflection of a segment's or a sector's performance, rather than the skill of the fund manager.
That's why investing in these funds require a different skill level and risk profile.
Broadly speaking, there are two kinds of investors - those who want to make quick bucks and those who seek long-term growth.
The problem occurs when some funds step into limelight due to their short-term performance and trigger the bandwagon effect, even on serious investors. It's times like these when greed takes over and everything
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