Recency bias is a powerful psychological trap for investors. It makes you overlook solid historical data and convinces you that the latest trend is the ultimate truth. When this bias influences your investment choices, it can lead to severe financial losses.
The Peril of Chasing Past Performance
Imagine investing in a mutual fund simply because it delivered stellar returns last year or because a friend enthusiastically recommends it. A few years later, you might find that the fund's star has faded dramatically. This scenario is not just hypothetical; it is backed by hard evidence from a recent analysis.
A detailed study by PGIM India Mutual Fund exposes how unreliable short-term performance can be as a predictor of future results. The research tracked the top 10 equity mutual funds from 2014 and observed how their rankings changed each year through 2025.
The findings are eye-opening. For example, the fund that ranked first in 2014 held its position in 2015 but crashed to 128th place by 2016. Another fund, ranked second in 2014, slipped to 37th in 2015 and then plummeted to 141st in 2016. A third fund, which was third in 2014, rose to second in 2015, fell to seventh in 2016, and slid further to 46th by 2017.
Clearly, selecting a fund based only on a short, recent track record is a recipe for error. Investors must look for funds that demonstrate consistent performance over longer cycles, not just those benefiting temporarily from a market phase that suits their style.
A Better Way to Evaluate Funds
As explained by Jash Kriplani, the PGIM study underscores why historical rolling returns are a superior metric compared to the widely advertised point-to-point recent returns. Rolling returns analyze performance across multiple overlapping periods, such as calculating three-year returns daily over many years. This provides a more robust and realistic picture of a fund's behavior across different market conditions.
However, the analysis should not stop there. A comprehensive evaluation must also consider the fund's investment style, the experience and stability of the fund management team, and key risk ratios. These factors combined offer a much clearer view of the fund's potential and risks.
This data also reinforces the critical importance of diversification. Since market leadership and investment styles rotate over time, spreading investments across different categories and fund houses is the safer strategy.
Other Key Personal Finance Updates
In related news, the Income Tax Department has been sending SMS alerts and emails to numerous salaried taxpayers, highlighting discrepancies in deductions and exemptions claimed in their Income Tax Returns (ITR).
This issue often arises when employees declare fewer deductions to their employer for Tax Deducted at Source (TDS) calculations but claim a higher amount while filing their ITR, leading to large refund claims. Form 16, which reflects the initial declaration to the employer, flags these mismatches. To maintain good tax hygiene and avoid department queries, it is crucial to submit all investment proofs to your employer on time, ensuring Form 16 and your ITR are aligned.
Another area requiring attention is the corporate National Pension System (NPS). Despite its tax advantages, uptake remains low. Under the New Tax Regime, employees can claim a deduction for their employer's NPS contribution up to 14% of basic pay plus dearness allowance. In the Old Tax Regime, this 14% limit is for government employees, while others have a 10% cap. Additionally, employees can claim deductions for their own contributions under Section 80C (up to ₹1.5 lakh) and an extra ₹50,000 under Section 80CCD(1B). Given recent NPS reforms, this option merits serious consideration.
For families considering overseas education, a double challenge has emerged: inflation and rupee depreciation. Studying abroad has become significantly more expensive, and the return on investment is under pressure as job markets tighten. The weakening rupee drastically increases the rupee cost of dollar-denominated tuition and living expenses. Financial prudence is essential—avoid depleting other crucial savings, explore education loans, and consider building a global asset portfolio to hedge against currency risk.
As we progress into the new year, setting clear money goals for 2026 is vital. Adopting a process-oriented framework can help avoid financial FOMO, encourage caution with debt, and build the discipline needed for consistent saving and investing.
