Mutual Fund Returns: Past Performance is Risky Guide

MUTUAL-FUNDS
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AuthorAarav Shah|Published at:
Mutual Fund Returns: Past Performance is Risky Guide
Overview

A PGIM India Mutual Fund analysis reveals top-performing funds frequently plummet in rankings, challenging investor reliance on recent returns. The study tracked rank shifts over years, showing drastic declines. Experts urge investors to examine risk-adjusted performance, rolling returns across longer periods, fund manager philosophy, and diversification over chasing short-term gains.

Past Performance Deceptive

Many mutual fund investors mistakenly rely on past performance, especially the previous year's top performers, to select funds. A comprehensive analysis by PGIM India Mutual Fund, however, starkly challenges this common practice. The study tracked the annual ranking shifts of top equity mutual funds from 2014 through 2025, revealing a high degree of volatility.

Study Highlights Rank Volatility

The research tracked funds without naming them, focusing solely on their movement in performance rankings. For instance, a fund that topped equity rankings in 2014 and 2015 plummeted to 128th place in 2016. Another, ranked second in 2014, slipped to 37th in 2015 and then to 141st the following year. By 2018, every fund that had been a top performer had fallen into the bottom quartile. This pattern persisted even within specific categories like mid-cap funds, where top performers in 2018 dropped significantly by 2021.

Beyond Short-Term Gains

Analysis based on three-year returns also yielded similar results regarding consistency. Only a small fraction of funds that started in the top quartile between 2014-2017 remained there in 2018. Abhishek Tiwari, CEO of PGIM India Mutual Fund, noted that fund performance isn't solely due to skill, but also market cycles and investment styles. He stressed the importance of diversification, stating, "When the market cycle changes, the leaderboard changes too." Investors chasing recent peaks often attract large inflows just before performance declines.

Expert Advice for Investors

Financial advisors emphasize looking beyond simple point-to-point returns, which can be misleading. Vishal Dhawan of Plan Ahead Wealth Advisors suggests examining risk-adjusted performance across rolling periods. Kaustubh Belapurkar from Morningstar Investment Research recommends analyzing SIP returns and steady performance across cycles. Experts like Deepak Chhabria advise understanding the fund manager's philosophy and their conviction. Surya Bhatia, a financial advisor, prefers funds with long-term track records across market cycles. Assessing the investment team and looking at risk ratios like the Sharpe and Sortino ratios are also recommended for a more robust selection process.

Disclaimer:This content is for educational and informational purposes only and does not constitute investment, financial, or trading advice, nor a recommendation to buy or sell any securities. Readers should consult a SEBI-registered advisor before making investment decisions, as markets involve risk and past performance does not guarantee future results. The publisher and authors accept no liability for any losses. Some content may be AI-generated and may contain errors; accuracy and completeness are not guaranteed. Views expressed do not reflect the publication’s editorial stance.