What Are Trending Funds?

Advantages of Investing in Trending Funds

Investing in trending funds can offer several potential benefits to your portfolio.

• Potential for High Growth: These funds are often trending because they have delivered strong recent performance, which may continue if the underlying market conditions persist.
• Potential to Outperform FDs: During a bull market, trending funds, especially those focused on equities, have the potential to deliver significantly higher returns than traditional fixed deposits.
• Built-in Diversification: Most trending funds invest across a diverse basket of stocks or assets, which helps in spreading risk compared to investing in single stocks.

Who Should Invest in Trending Funds?

Trending funds are suitable for specific types of investors who understand the associated characteristics.

• Investors with a High-Risk Appetite: Since these funds are often tied to market momentum, they can be volatile. They are best suited for investors who are comfortable with taking on higher risk for potentially higher returns.
• Investors Seeking a Simplified Approach: For those who don't have the time to research individual stocks, these funds offer a managed portfolio aligned with current market opportunities.
• Investors Preferring Systematic Investments (SIPs): You can invest in trending funds through SIPs, allowing you to invest smaller, regular amounts and benefit from rupee cost averaging.

Points to Consider Before Investing in Trending Funds

Before investing, it's crucial to evaluate these funds based on several key parameters.

• Investment Horizon: Align the fund with your investment timeline. A trend might be short-lived, so ensure the fund's strategy matches your long-term or short-term financial goals.
• Past Performance: While past performance is not a guarantee of future returns, it provides insight into how the fund has performed across different market cycles.
• Expense Ratio: This is the annual fee charged by the fund house. A lower expense ratio means a larger portion of the fund's returns is passed on to you.
• Fund Manager's Experience: A fund's success often depends on the fund manager's expertise. Review their track record and experience in managing similar funds.
• Underlying Portfolio: Look at the stocks and sectors the fund invests in to understand where the growth is coming from and to ensure it aligns with your risk profile.

Limitations of Trending Funds

It is important to be aware of the potential downsides before making an investment decision.

• Market Risk: The value of these funds is tied to market performance. A downturn in the market can negatively impact returns, and a trend can reverse unexpectedly.
• No Guaranteed Returns: Unlike fixed-income products, mutual funds do not offer guaranteed returns. There is always a possibility of capital loss.
• Performance Chasing: Investing solely based on recent trends can be risky. A fund that performed well last year may not be a top performer this year.

Should You Choose Trending Funds?

Trending funds can be a good option for investors with a higher risk tolerance who are looking to capitalise on market momentum for potentially high returns. They are an easy way to access a managed portfolio of assets that are currently performing well.

However, it's crucial to look beyond the trend and evaluate the fund's fundamentals. Always ensure that the fund's investment objective and risk level align with your own financial goals and investment horizon.