When it comes to investing, choosing the best instrument is not the best course of action. That holds true in mutual funds. Evaluating the performance of a fund goes beyond its performance. Find out why.

At the very least, an investor should scrutinize the fund’s returns over the last three to five years. Just because it exhibited an impressive performance in a quarter or year does not imply it will stay that way in the long run. Evaluate the fund’s manager as well. The market is volatile in nature; hence, giving an indication on how the fund holds itself up in bearish or bullish environments. Here’s what you can do: look for funds that can perform and review how the manager oversees the fund in the long stretch. Bear in mind the best performers may not be able to retain its advances after a few years.

Modern portfolio theory is another factor to consider. In essence, MPT takes into account the following: potential holdings for a portfolio and its projected returns, volatility, and connection of all investments to one another to figure out the best asset combination for maximizing portfolio and minimizing risk. It can be done using a software to automatically collate all details and run the computation.

MPT has two determinants: right asset disbursement and risk. The first takeaway is useless if the selected fund (or any asset for that matter) does not help in attaining your financial goals and diversification. Referring to the second takeaway, risk and volatility are interconnected. Risk is inevitable, but experiencing too much downtrends makes it more difficult to get even or recuperate and then return to positive territory.

Timing the market is an impossible task. Same thing with trading within and outside the funds. Instead of chasing profits, you might end up incurring costs. Not to mention it lowers the odds of generating higher returns. It is much better to trade steadily than enter and exit the crowded market simultaneously.