What trending funds mean and why investors should be wary of them
Trending funds are often displayed prominently on app home pages, search results pages, and promotional materials put out by many fintech apps. These apps utilize eye-catching pictures, banners, or carousel placements to gain attention.
However, their emphasis on past performance may give significance to short-term gains while underplaying risks. Key components such as expense ratios, risk variables, and investment strategies are sometimes provided in a simplified or condensed form, which could lead investors to take rash decisions without sufficient research.
Even though investing in such advertised or trending funds doesn’t necessarily align with their financial goals, users may be persuaded to do so because of the incentives or other rewards. “Past returns are not an indicator of future returns" is a disclaimer that we often see in every mutual fund or investment advertisement, however the irony being that investments are bought and sold globally on the basis of past returns.
Despite all the disclaimers and information, it continues to be difficult to overcome human psychology of greed, fear and herd mentality. Herd mentality that drives investors to hop onto the best performing asset class is being exploited by platforms seeking business that is not necessarily in the best interests of the user.
Reversion to mean, which implies that asset classes that outperform or underperform drastically eventually revert to their means, is an often-used strategy by value investors globally aiming to capitalize on this with a far lesser degree of risk than by playing the latest fad in town. Unfortunately, most transactional platforms that have expanding the user base with the least amount of money focus on luring investors with
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