Are you chasing returns or actually chasing value with your investments?

If you open an investment app, you will always see the same information there: 1-year returns, 3-year returns, 5-year returns. The temptation to invest in what is shown at the top of this list will always be strong. However, following the number on the screen and following the value are two entirely different things. Let's get into details.

What chasing returns looks like

Picking a mutual fund or ETF based solely on its returns over the period of the last year or 2 is a classic example of chasing returns. Typically, the strategy involves picking a sector or a theme that performed well in the recent period. Whether this is a certain industry, a small-cap rally or a certain fund that managed to hit the jackpot with some stocks, all of these are examples of chasing returns.

The problem with this strategy is that the repeating sequence is rare, and it can be extremely hard to predict. The mutual fund that was at the top of the list in one period may very well become a laggard in the next period after the factors that helped it to perform so well in the previous period are gone.

Such lists of high return mutual funds don't address the right question. They only show past performance, and not what the fund is holding at the moment, what its valuation level is relative to its assets and whether this mutual fund suits your purposes or not.

What is chasing value

The concept of value investing addresses another question: Is the asset I'm buying priced appropriately, taking into account its fundamentals? Rather than asking what asset performed best in the past, the value investor tries to understand what I am paying for and whether it is appropriate for what is being offered to me. This changes the approach to the analysis of any fund or stock.

Here comes into play the idea of the Nifty 500 Value 50 index funds category. These funds are based on selecting companies from the Nifty 500. Selection criteria include value indicators such as price/earnings ratio, price/book value, dividend yield and return on capital employed. Thus, instead of depending on the fund manager's stock-picking skills, this rules-based approach offers investors a transparent and repeatable method of selecting undervalued companies.

Why is this distinction important for you

Returns are results. Value is the process of getting them. If one looks only at the results of the investment process, then he/she reacts to the past and hopes that it will happen again in the future.

When one knows how and why a certain fund performs well in different market conditions, it becomes much easier to stick to it through thick and thin and not to sell it at the lowest possible price. Thus, understanding the process behind the returns helps to make better decisions about holding mutual funds.

There is nothing wrong with high returns per se. Mutual funds can possess both value and good performance. The key point here is to make sure that there is value behind high returns.

Conclusion

Before making an investment, ask yourself what it is that you are really investing in. Go beyond just looking at the return rate of the fund and check its holdings and valuation levels. If you can't explain why the mutual fund should perform well in the future other than by stating that it performed well in the past, then chances are you are chasing returns.