Personal Finance & Investment Insights from our desk
Every few months, investors rush toward the latest #1 ranked mutual fund.The assumption is simple if it has given the highest returns, it must be the best.
But in reality, the top-performing fund is rarely the best choice for your long-term goals.
Here’s why.
1. Past performance may not be repeated in future
A fund that tops the charts today has done well in one specific market phase. But markets change and leadership rotates. For example, small-cap or sector funds may deliver stellar returns in one year, but struggle in the next when the cycle turns. So, the fund that looks "best" today might not even be in the top 10 next year.
Instead of asking "Which fund gave the highest return?", ask "Which fund performs consistently across market cycles?"
2. High return often means high risk
Most top-performing funds reach that spot by taking extra risk by investing in volatile sectors, mid or small caps, or concentrated themes. That's fine if you have a long horizon and high-risk tolerance but not if your goal is stability
To truly compare funds, look at risk-adjusted ratios like:
- Sharpe Ratio - measures return per unit of total risk
- Sortino Ratio – measures return per unit of downside risk
A fund with slightly lower returns but higher Sharpe/Sortino scores is often a better investment than one that topped the charts.
3. Size and popularity can hurt future performance
When a fund starts topping charts, large inflows follow. This makes it harder for the fund manager to replicate past success. Too much money can reduce flexibility and the manager can't enter or exit smaller opportunities easily without impacting the price of the underlying. This is why many once top-rated funds underperform after becoming "too large to move efficiently.
4. Fund manager skill matters more than recent numbers
A great fund manager's true test isn't one strong year, it's the consistency through good and bad markets.
Look for:
- Long-term track record across multiple funds or cycles.
- Stable investment team and process.
- Clear communication of strategy (not frequent changes)
Returns without a repeatable process are just luck and luck doesn't compound.
5. Style drift can break your portfolio balance
Top-performing funds sometimes change their style to stay competitive. For instance, a fund can take more exposure to mid & small cap to boost returns. While this helps shortterm performance, it quietly alters your portfolio's risk. Over time, you might end up with a much riskier allocation than intended.
6. Chasing winners breaks compounding
Switching from one "top" fund to another every few quarters may feel smart, but it usually hurts returns. To test this hypothesis, if you go back to 1st January of each year and see the past 1-year returns, you would notice that the top funds would be different each year. Also, each switch can lead to:
- Exit loads and taxes
- Missing out on key market days
- Emotional decision-making
Compounding works best with time and patience, not constant reallocation. A consistent fund held through cycles often beats a series of "best" funds held briefly.
7. The smarter way to choose a fund
Instead of looking only at 1-year or 3-year returns, focus on
- 5-year and 7-year rolling returns – shows consistency.
- Sharpe / Sortino Ratios – shows efficiency of returns.
- Alpha – measures fund manager’s skill in beating the benchmark.
- Standard Deviation – indicates volatility
The goal isn't the "highest return" but the most stable journey toward your goal.
8. Align with your own plan, not the market's mood
The right fund depends on:
- Your financial goals
- Your time horizon
- Your comfort with volatility
A balanced portfolio of quality, process-driven funds usually outperforms a randomly selected "top performer" over the long term.
Final Thought
The best-performing fund today might not be the best fund tomorrow. But a fund that consistently rewards discipline, manages risk well and follows a clear process - that's the one that quietly creates wealth over time.
In investing, the goal isn't to find the fastest horse…it's to finish the race comfortably.
Over to you
So, when you choose mutual funds, do you look at returns first or consistency first?