Key Insight: Short-term, one-year returns should not drive investment decisions; investors must focus on long-term performance, asset allocation, and portfolio diversification to achieve sustainable wealth creation, says Radhika Gupta, CEO of Edelweiss Mutual Fund.
Why Short-Term Returns Are Misleading
Gupta emphasizes that chasing high past performance in mutual funds, ETFs, or equity funds based on a single year is risky for both retail and institutional investors:
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Securities and portfolios with high one-year returns often attract inflows after the market peak, creating valuation pressures and reducing total return potential.
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Investors in diversified portfolios, including large-cap, mid-cap, and small-cap stocks, bonds, and alternative investments, must avoid performance chasing to prevent capital loss.
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Focusing solely on recent asset performance, such as ETFs or index funds, ignores the importance of asset allocation, diversification, and risk-adjusted returns.
“Past one-year returns are the enemy of disciplined investing. Rolling returns and consistent performance reflect true fund quality,” Gupta says.
Metrics Investors Should Prioritize
Instead of short-term metrics, Gupta suggests using a long-term investment process emphasizing risk management, diversification, and sustainable growth:
✔ Rolling Returns (3Y, 5Y, 10Y)—shows performance across market cycles relative to index funds, equity funds, and bond funds.
✔ Asset Allocation & Portfolio Management—balancing stocks, fixed income, real assets, ETFs, and money market funds to match risk tolerance.
✔ Diversification Across Asset Classes—including emerging markets, commodities, and global equities to reduce volatility and capture capital appreciation.
✔ Expense Ratio & Morningstar Rating—evaluating costs and professional ratings helps portfolio managers and financial advisors make informed investment decisions.
✔ Long-Term Investment Strategies—adopting buy and hold, capital management, and tactical asset allocation methods ensures growth while mitigating risks in bear markets or volatile periods.
Behavioural Traps to Avoid
Gupta warns that focusing on short-term returns encourages investment greed and poor strategy:
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Performance Chasing: Buying overvalued stocks or funds after strong past returns increases market risk.
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Ignoring Risk Tolerance & Financial Goals: Over-concentration in small-cap or high-yield equity funds without proper rebalancing exposes investors to drawdowns.
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Misinterpreting Net Asset Value (NAV) and Index Performance: One-year NAV growth is not indicative of long-term growth or total return potential.
Practical Takeaways for Investors
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Diversify Investment Portfolio: Mix equities, bonds, ETFs, money market funds, and real assets to manage risk.
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Evaluate Fund Manager & Investment Process: Assess active management, track record, and adherence to investment objectives.
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Prioritize Long-Term Horizons: Focus on capital appreciation, deferred gains, dividend reinvestment, and strategic allocation rather than short-term snapshots.
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Use Risk-Adjusted Metrics: Consider standard deviation, historical performance, market volatility, and interest rate sensitivity.
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Leverage Professional Guidance: Work with financial advisors, wealth managers, or CFA-certified professionals for portfolio structuring, target-date funds, and retirement planning.
Why This Matters
Markets are inherently volatile, with fluctuations in market capitalization, asset value, and interest rates. Investors relying on one-year returns risk underperformance relative to long-term benchmarks like the S&P BSE Sensex, Nifty 50, or global equity indexes.
A strategic approach using diversification, disciplined asset allocation, and risk-aware rebalancing is critical for long-term investment success.
“Investors must focus on diversified portfolios, long-term returns, and consistent asset allocation. One-year performance is a poor guide,” says Gupta.
