What is a trend fund and why investors should be wary of trend funds?

The disclaimer “Past returns are not indicative of future returns” is common in all mutual funds and investment advertisements, but ironically, investments are bought and sold around the world based on past returns. I am. Despite all the disclaimers and information, it is still difficult to overcome human psychology such as greed, fear, and herd mentality.

The herd mentality that encourages investors to jump to the best-performing asset classes is being exploited by platforms seeking business that is not necessarily in the best interest of their users.

Reversion to the mean means that an asset class that significantly outperforms or underperforms will eventually return to its mean value, and you can do this with far less risk than jumping on the latest fad. It is a strategy commonly used by value investors around the world who aim to take advantage of the .

Unfortunately, most trading platforms that are growing their user base with minimal capital are focused on luring investors with high historical returns, and therefore funds with the best historical performance. or themes, but in most cases it turns out to be the wrong decision. For investors.

According to data from the Association of Mutual Funds of India, small-cap funds, which have performed very well in the past 12 months, have grown from around 10 million folios in December 2022 to around 17 million folios in December 2023. However, the mid-cap fund's folio increased from 10 million to about 12.8 million. Small-cap stocks alone increased by 70%, while flexi-cap funds only increased by 1 million folios over the same period.

This is a worrying trend, as historical data shows that yesterday's winners rarely do well in their next move, and losers often become new winners.

Although the BSE Small Cap Index produced a return of 70% in 2017, it witnessed a hefty 50% decline from its peak and took four years to recover its previous highs. Most major trading platforms publish data on “best performing funds/popular funds this year” on the front page of newspapers and discourage investors because no one wants to invest even if they know about the above trends. It tempts you to trade in those schemes. Asset classes that are underperforming.

Here, new-age Registered Investment Advisors (RIAs) ensure that investors don't fall prey to the latest trends and thoroughly check their risk tolerance, risk appetite, and financial goals when making investment decisions. We are trying to provide value by doing this.

Smart financial planning practices involve determining risk tolerance (defining your emotional tolerance for risk, often in the form of a survey) and risk tolerance (defining your emotional tolerance for risk, often in the form of a questionnaire) and risk tolerance (funding for short-term financial goals of less than three years The goal is to ensure that no investment is made. stocks) are taken into account when planning investments.

Proper financial planning also considers stability and profit optimization rather than maximization, which involves high risk.

In his book Think Fast and Slow, Nobel Prize winner Daniel Kahneman mentions two systems in our brains. System 1 is quick, instinctive, and emotional. System 2 is slower, more careful, and more logical. Decisions made in haste often lead to wrong decisions, but they are more common due to the fact that humans don't use System 2 because they don't want to strain their minds too often. This instantaneous thinking is being leveraged by platforms and distributors. Their quest to acquire more users.

There are currently approximately 150,000 mutual fund distributors, but only 1,300 RIAs, demonstrating a significant lack of well-informed advisors. A platform that will ensure users receive the right advice in the coming years as the new RIA movement deepens with relaxed regulations and better data reforms like the Account Aggregator ecosystem It is expected that a new system will be introduced. More logical thinking for them.

Vivek Banka is the co-founder of Goalteller.