When choosing any type of investment, be it index funds, mutual funds, or stocks of a particular company, the first thing you look at is their historical performance, which is primarily important. But, have you ever thought that such a historic performance gives hope for future comebacks?
Along with the track’s historical performance, there are many other aspects to consider before investing. Here are 3 reasons why basing your decisions solely on past records is misleading.
By looking at a company’s AGM minutes, you can determine whether their vision for growing your money is sustainable. In the past, the company or index may have performed well because of the trend or government support or other factors related to macro and micro economy. However, future returns also depend on current economic conditions and internal management.
If the internal management of the company is looking forward to expanding its operations in line with the direction of the economy, the potential for growth is very high even if the industry has not performed well in the past.
Current economic conditions
Balancing the portfolio makes serious sense only because of the volatile nature of the economy. Talking about the current state of the country, inflation is reaching high levels and the possibility of going into recession is increasing. However, Indian stock markets are still doing well compared to other countries.
It will be important to consider the current economic conditions and analyze the industries that have a positive and negative impact. Indices or stocks have given better returns in the past due to economic conditions, however, current economic conditions may change and affect few stocks permanently.
Keep up to date with government regulations on industries, as these regulations can also have a significant impact on your returns. Strict measures taken by the government may adversely affect the companies and reduce their net profit. Eventually, yours will be back.
On the contrary, government assistance like PLI (Production Linked Incentive) has given growth to industries. Such an initiative by the government can help your investment, which will give you good returns in the future. Their historical performance may not be as good as it will be in the future.
There are various other points that may be important to the expected returns on your investment. These three points are prioritized in addition to the historical performance of the investment path such as the industrial market, new technologies and companies taking their first steps to adopt the technology.
If you’re investing through a fund, your fund manager plays a big role in their portfolio and performance. The type of fund and your risk appetite is an important aspect to decide before investing.
Anushka Trivedi is a freelance financial content writer. It can be found on her anushkatrivedi.com
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First published: December 15, 2022, 11:28 am IST