Indian mutual fund investors often gravitate towards last year's top performers, finding comfort in recent high returns. However, a new analysis from PGIM India Mutual Fund warns that this common practice is a potentially risky guide for future investments.
The Volatile Leaderboard: A Data-Driven Reality Check
The study, which tracked the performance trajectory of top-ranked equity funds over a decade, delivers a sobering message. It followed the top 10 equity mutual funds of 2014 and observed how their rankings shifted each year through 2025. The findings underscore the fleeting nature of short-term outperformance.
For instance, the fund that clinched the number one spot in 2014 managed to retain its rank in 2015. Yet, its fortune reversed dramatically, with it plummeting to the 128th position in 2016. Another fund, ranked second in 2014, slipped to 37th in 2015 and further down to 141st in 2016. By 2018, every single top-10 fund from 2014 had moved to the bottom quartile of the performance chart.
The Same Story Across Categories and Timeframes
This pattern held true even within specific categories like mid-cap funds. The top-performing mid-cap fund of 2018 held its ground in 2019 but then began a steady descent, falling to sixth in 2020 and 17th in 2021, remaining outside the top 10 thereafter.
The study also examined whether a longer performance window offered more stability. It analysed rankings based on three-year returns. The results were similarly stark. For example, only 12.5% of funds in the top quartile from 2014-2017 remained there in 2018. This figure dropped to just 8.3% for the 2015-2018 top quartile funds staying on top in 2019.
Why Recent Returns Are a Deceptive Metric
Experts point out that a fund's position at the peak is not solely a testament to skill. Specific investment styles perform well during particular market phases. Abhishek Tiwari, CEO of PGIM India Mutual Fund, illustrated this with 2024 data, where the gap between the best and worst-performing mid-cap fund was a staggering 45 percentage points, driven by momentum and value styles dominating the market.
"These data points highlight the importance of diversification when building a mutual fund portfolio. When the market cycle changes, the leaderboard changes too," Tiwari explained. This rotation means investors focusing only on recent returns may be buying into a fund just as its peak performance is ending.
A cautionary tale is the top-ranked mid-cap fund of 2024, which attracted between 22% and 53% of the category's inflows, only to crash to the 259th rank in year-to-date returns afterward.
Moving Beyond Point-to-Point Returns
Vishal Dhawan, founder of Plan Ahead Wealth Advisors, notes that trailing returns are the most used metric simply because they are the most published. However, point-to-point returns can be heavily biased by their start and end dates.
Kaustubh Belapurkar, Director of Manager Research at Morningstar Investment Research, advocates for a more robust approach. Investors should examine risk-adjusted performance across rolling periods. "Since most retail investors invest through SIPs, analysing SIP returns is also useful. Ultimately, the ability to perform steadily across cycles matters more than short-term outperformance," he stated.
Rolling returns, calculated by taking the average of daily returns over a specified period, provide a more comprehensive view. Analysing 10 or 20-year rolling returns that span multiple market cycles offers a much clearer picture of a fund's consistent performance.
The Critical Factors Beyond Returns
Belapurkar emphasises that returns are the outcome of a strong team and a repeatable investment process. "It is unlikely that a fund can consistently deliver excellent returns without a good team and process," he said.
Dhawan advises incorporating risk ratios like the Sharpe ratio and Sortino ratio into the selection process to understand returns generated per unit of risk.
Mutual fund distributors stress understanding the fund manager's philosophy. Deepak Chhabria of Axiom Financial Services suggests tracking a manager's commentary, investment notes, and factsheets. "You must also look for fund managers that stick to their philosophy despite the market noise," he added.
Surya Bhatia of Asset Managers advises caution with new funds, preferring those with a long-term track record across market cycles. This reflects a broader industry tendency to avoid funds lacking a proven history.
The Final Takeaway for Investors
While recent returns grab headlines and advertisements, they are a flawed foundation for portfolio building. The prudent path involves starting with an analysis of historical rolling returns over 7-10 year cycles or more. For investors committing monthly savings that form the bedrock of their financial health, it is crucial to look beyond returns. Dedicating time to assess the investment team, process, and philosophy, alongside risk metrics, is the key to making informed, resilient mutual fund investments.
