Before you invest, you should make sure a mutual fund has done well for 5-10 years. true or false

Before you invest, you should make sure a mutual fund has done well for 5-10 years. true or false

Answer:

The correct option is False.

An important aspect that can be useful when choosing a mutual fund is the data related to its past performance which may be several years ago, but still may show the reliability and stability of the fund. Nevertheless, relying solely on past results is all but accurate and rather may be ruinous to your investment plan. The financial markets are not stagnant and one cannot wait to have a similar kind of performance always in the future. For example, the high performers in a particular market environment might not do too well in another environment such as a bear market or the like. Thus, investors must remember that there are more criteria which should be considered when choosing mutual funds rather than the historical results. These are based on the investment approach embraced by the fund, the risks involved, the overall expense ratio and the capabilities of the fund manager as well as its conformity to one’s financial plan and perceived level of risk. For example, selecting a fund that yields less and is more stable, and comes with lower fees, from a fund that yields high figures, but is highly volatile and expensive to manage. Further, conditions in the market and the general economic climate that helped a fund to perform well in the past, may not hold water in the future. An example of this is when the direction of the market changes for example during the financial crisis of 2008 or the pandemic in 2020 and the effect of such changes on a usually successful fund. Thus, history can be useful, but only when integrated with other models of analysis when making investment decisions.