Many Indian investors are drawn to mutual funds for faster wealth accumulation than traditional savings avenues. However, financial experts caution that a narrow focus on absolute returns—simply looking at the profit number—can be misleading. While investors often celebrate high gains, they rarely examine the underlying factors that drive these returns, potentially exposing themselves to avoidable risks.
Abhishek Kumar, a SEBI-registered investment adviser and founder of Sahaj Money, explained that absolute returns measure only the total gain or loss on an investment, ignoring the time horizon. “Two investors may earn similar profits in rupee terms over different durations. Without factoring in the investment period, one might misjudge which fund actually performed better,” he said.
To address this, experts recommend using XIRR (Extended Internal Rate of Return). Unlike absolute returns, XIRR annualises returns while accounting for multiple investments and withdrawals, such as those in systematic investment plans (SIPs). Kumar noted that XIRR offers a more realistic picture of an investor’s actual gains because it considers the timing of cash flows and the real-world structure of investments.
Beyond returns, evaluating a fund’s health is crucial. Risk metrics such as standard deviation and Sharpe ratio, expense ratios, asset allocation, fund manager track record, and consistency of performance provide insight into a fund’s stability. A fund delivering steady returns with manageable risk is often healthier than one with fluctuating high profits and losses. Trivesh D, COO of Tradejini, added that investors often overlook whether returns were generated efficiently or whether the fund consistently outperformed its benchmark. Blindly chasing high returns without understanding fund structure can lead to disappointment.
Another common pitfall is overreliance on star ratings provided by financial portals. Kumar warned that these ratings are often opaque and can mislead investors. While ratings can serve as a starting point, a careful review of the fund’s portfolio, track record, and costs—such as expense ratios and exit loads—is essential. Comparing a fund’s performance against its benchmark index and peers within the same category helps determine whether the returns reflect real value or simply mirror market trends.
Regular reviews are key for long-term investors. Kumar advised evaluating fund performance at least annually, considering benchmark comparisons and peer returns. Investors should make decisions to stay invested, switch, or exit based on consistent underperformance, changes in risk appetite, or evolving financial goals, rather than short-term market noise. Trivesh added that a disciplined, data-driven approach over multiple review cycles ensures better results than reactive decision-making.
Experts agree that successful mutual fund investing relies on discipline, patience, and focus on quality rather than chasing fleeting high returns. Understanding a fund’s risk profile, consistency, and managerial strategy matters far more than last year’s top performer. Steady, long-term performance, combined with informed evaluation, is the foundation for sustainable wealth growth.
