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Returns, performance and comparison

Should You Switch to Last Year’s Best-Performing Mutual Fund?

Past performance can be useful evidence. The mistake is allowing a recent return ranking to substitute for investment analysis, portfolio role and suitability.

Harsh Gahlaut, Co-founder & CEO, FinEdge

Written by

Harsh Gahlaut

Co-founder & CEO, FinEdge

Published Updated

The airport test

Destination first. Product second.

Destination

Investment objective

Distance and time

Investment horizon

Aircraft

Investment product

Fit for the route

Suitability, risk and portfolio role

Crowd at the gate

Popularity and social proof

Shiniest aircraft

A fashionable recent winner

Recent returns are evidence—not the decision

Choosing a fund because it topped the recent return table is like boarding the busiest aircraft at the airport without first checking where it is going. There may be many good products. The investor’s destination determines which one is relevant.

Rational research can examine investment process, portfolio role, risk, return in context, consistency across cycles, portfolio characteristics, valuation or exposure where relevant, manager and process changes, and long-term evidence. Return chasing asks only which one recently returned the most. Those are not the same activity.

How the return-chasing cycle forms

01

Strong recent return

02

Attention and social proof

03

Higher expectations and purchase

04

Cycle changes, disappointment and switching

By the time an investment becomes widely discussed because of exceptional recent returns, a meaningful part of that outperformance has already happened. What happens next depends on the underlying investment, market cycle, valuations, risk and strategy—not on the trailing return ranking.

Return chasing changes expectations as well as holdings

Exceptional recent return can become expected return. Normal returns then feel disappointing, the risk behind the earlier result becomes less visible, temporary lagging performance becomes harder to tolerate, and the investor becomes vulnerable to the next popular product.

Return chasing does not only change what you buy. It can change what you expect.

A portfolio is not a collection of today’s winners

Different investments have different roles and may lead and lag at different points in market cycles. If every fund in a portfolio has to be the top performer at the same time, the investor does not really want a portfolio. They want a collection of today’s winners.

This is not an argument for retaining an unsuitable holding indefinitely. A product may need to change when its underlying role, investment thesis, suitability or portfolio requirement materially changes. That decision belongs to analysis, not a leaderboard — a portfolio review asks what each holding is there to do before asking whether it should be replaced.

What current evidence can—and cannot—show

S&P Dow Jones Indices’ U.S. Persistence Scorecard for year-end 2025 found substantial instability in performance leadership: only 0.46% of domestic equity funds remained in the top quartile for five consecutive years. This is U.S. evidence, not a direct finding about Indian mutual funds.

For India, the SPIVA India Year-End 2025 scorecard shows that active-fund outcomes vary materially by category and horizon; it is not a direct persistence study. The two datasets answer different questions and should not be combined into a claim that an Indian fund’s recent rank predicts its future rank.

Build the strategy before evaluating products

The higher-order decision—how purpose, maths, time, informed risk and portfolio structure become an investment strategy—belongs to Best Investment Strategy. Product evaluation belongs to Mutual Fund Investing.

Review the role before replacing the holding.

Speak to an Investment Manager

About the author

Harsh Gahlaut, Co-founder & CEO, FinEdge

Harsh Gahlaut

Co-founder & CEO, FinEdge

Harsh Gahlaut is the Co-founder and CEO of FinEdge. His work focuses on FinEdge’s investment thinking, investing philosophy, investor proposition and the strategic questions that shape how the firm serves investors.

Writes on investing decisions, goal-based investing, portfolio choices and how investors can make better long-term decisions.