My fund topped the charts last year, now it's lagging. Should I switch to this year's top performer?

Chasing last year's top-performing funds often leads to buying late and selling early, quietly eroding your long-term wealth.

One of the most common mistakes investors still make is buying funds based on recent performance rather than on process. Last year's winner often rode a particular style or segment that happened to be in favour, and when the cycle turns, that same fund can easily slip down the table.

If you switch every time the leaderboard changes, you risk buying after the good run and selling after the bad patch. Cycles are also getting shorter these days, meaning leadership can rotate faster and make chasing the top spot even more tiring.

Instead of looking at recent returns, think of a fund like a recipe. If the ingredients are right and the process is sound, give it enough time and it usually works out, even if it takes a little longer than expected.

The good news is that a fund's process is usually written out and available for you to review. You can see how the manager picks stocks, what discipline they follow, and how the portfolio is built to weather different market conditions.

Advisors generally look at whether the manager has a good track record over full cycles, the pedigree of the team, and the stability of the firm behind it. Monthly portfolio disclosures and returns shown against the benchmark help you check whether the fund is actually doing what it says.

There are a few timeless rules that still hold true for any portfolio. The first is not to get carried away by recent returns, and the second is to tie each investment to a specific goal.

For example, your investment in a mid cap fund should have a clear purpose and a long enough horizon. The third rule is not to chase what someone else did, because a move that worked for a colleague might not suit your specific financial situation.

When deciding what to do now, ask yourself if anything has fundamentally changed in your fund's process, team, or approach, or if it is simply having a weaker year in its cycle. If the process is intact and your investment horizon is long, a lagging year alone is usually weak grounds for switching.

If the process itself has changed or you never understood it in the first place, a review makes complete sense. Just ensure you base your new choice on a solid investment process, not on who topped the performance list this year.

Based on Raghav's podcast with Sachin: https://foliyo.ai/blog/wealth-management-in-ai-era/
Disclaimer: All information shared above are strictly for educational and informational purposes only. It should not be construed as financial or investment advice.