Investors are warned to take the bigger picture into account before chasing high 12-month returns advertised by fund managers.
It follows a year of strong performance for global equity markets.
In a statement on Wednesday, the Financial Markets Authority (FMA) said it's concerned investors may be misled by marketing showing "phenomenal" investment returns in the year from April 1 2020 to March 31 2021.
This period captures COVID-19 recovery and doesn't take into account volatility of the previous months of February and March 2020, when market sell-offs occurred.
It's asking fund managers to comply. They should avoid advertising performance over the year to March 31 2021 and ensure the content and tone of their communications doesn't emphasise these returns.
FMA director of investment management Paul Gregory said strong 12-month returns shouldn't sway investors to think they're sustainable and change their strategy.
"For investors, the strong performance over the past year is not a reason to chase performance," Gregory said.
Once investors have chosen the right fund for their needs and attitude to risk, it's important to see it through.
"Rather it shows the value to investors of staying the course through market ups and downs with the manager and product you have," Gregory added.
Bringing annual performance data back one month makes a big difference to the results, the FMA said.
For example, over the year from April 1 2020 to March 31 2021, the NZX 50 shifts from a 23.94 percent gain to a more moderate 7.70 percent over the year from March 1 2020 to February 28 2021.
These shifts are also shown in the MSCI World fund and the S&P 500.
People investing in higher-risk funds, including growth funds, are urged to look at returns over the last three-to-five years, preferably longer.
"This is more a meaningful time frame to judge performance compared to just one year and is in line with minimum suggested time frames for staying in a growth fund," Gregory added.
Having discussed the issue within the industry, some fund managers share their concerns.
The FMA said it will monitor promotions over the 12 months from April 1 to March 31 2021 closely to check for potential breaches.
It's also looking at firmer rules around advertising, particularly fund managers who cherry-pick past performance information to create a more favourable impression.
