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Introduction

Every new year, many investors start by searching for the top-performing mutual funds of the previous year.

It feels logical — if a fund did well recently, it must be a good choice, right?

Not necessarily.

The truth is, past performance alone is one of the weakest indicators of future returns.
Markets evolve, trends shift, and last year’s winners often fail to repeat their success.

Let’s understand why chasing last year’s “best” mutual funds can be risky — and what truly smart investors focus on instead.

Why Investing in Last Year’s Best Funds Can Be Risky

1️⃣ Market Cycles Keep Changing

Each market phase favours different sectors or investment styles.
A small-cap fund that topped the charts last year might lag when large-caps take the lead or when markets turn defensive.

2️⃣ High Returns Often Come Back to Average

This is called reversion to the mean.
Funds that deliver outsized returns in one year often cool off later as markets stabilise.

3️⃣ Hidden Risks Behind the Returns

Many top-performing funds take concentrated bets on specific sectors or stocks.
When volatility hits, these hidden risks become visible — and painful.

4️⃣ Fund Manager or Strategy Changes

A new manager or strategy shift can completely change a fund’s risk profile and performance pattern.

Example: Short-Term Stars vs. Long-Term Stability

Fund Name1-Year Return (%)3-Year CAGR (%)Standard Deviation (%)Sharpe RatioABC Small Cap Fund42.818.122.50.78XYZ Flexi Cap Fund31.519.714.31.12LMN Large Cap Fund24.617.511.81.04PQR Mid Cap Fund38.916.319.40.81

Observation:
The top 1-year performer (ABC Small Cap Fund) looks impressive but it’s not the best when you consider 3-year performance or risk-adjusted returns.
In contrast, XYZ Flexi Cap Fund delivers steadier returns with lower volatility — a sign of strong investment process, not luck.

What Smart Investors Focus On (in 2025)

1️⃣ Consistency Over Time

A great fund isn’t the one that shines once — it’s the one that performs well again and again.

Fund Name1-Year3-Year5-YearRank StabilityABC Small Cap Fund42.8%18.1%14.6%❌ FluctuatingXYZ Flexi Cap Fund31.5%19.7%17.2%✅ ConsistentLMN Large Cap Fund24.6%17.5%15.8%✅ Consistent

A fund that stays in the top quartile consistently is more valuable than one that tops charts once.

2️⃣ Risk-Adjusted Returns Matter

It’s not about how high the return is — but how safely it was achieved.

Fund NameStandard DeviationSharpe RatioSortino RatioABC Small Cap Fund22.5%0.780.90XYZ Flexi Cap Fund14.3%1.121.30LMN Large Cap Fund11.8%1.041.15

Funds with higher Sharpe and Sortino ratios handle volatility better and offer smoother compounding.

3️⃣ Fund Manager Experience & Stability

Fund NameFund ManagerExperience (Years)Tenure with FundABC Small Cap FundMr. R. Sharma102 yearsXYZ Flexi Cap FundMs. A. Menon177 yearsLMN Large Cap FundMr. D. Patel124 years

A longer tenure means the manager has guided the fund through multiple market cycles with consistent strategy and discipline.

Think Like a Long-Term Investor

Instead of saying:

“This fund gave 45% returns last year — I’m going to invest in it!”

Ask yourself:

“Which fund has delivered steady 12–15% annualised returns over the last few years, managed risks well, and fits my financial goals?”

That’s the mindset of a disciplined, long-term investor.

Final Thought

Investing isn’t about predicting the next star performer — it’s about building a portfolio that wins over time.
Look for consistency, process, and risk control, not just flashy short-term numbers.

When you invest with patience and discipline, your money compounds quietly and powerfully through every market cycle.

Need Help Selecting the Right Mutual Funds?

If you’d like a personalised portfolio review or a goal-based SIP plan, connect with us today:

Dr. Shailesh Bhardwaj
Managing Partner | Finalyst Partners
🌐 www.Finalyst.in
📞 93500 66809

💡 Let’s invest not where performance was — but where potential still is.