The Hidden Risk in Chasing Top-Performing Mutual Funds
Last week, a new investor approached us for financial planning. During our introductory conversation, I asked him how he was currently investing. He mentioned that he was managing investments on his own by selecting top-performing mutual funds from various websites and apps. When he showed us his portfolio, nearly all his funds were in the red. Surprisingly, many of them were the best-performing schemes from the last one or two years, including sector and thematic funds.
This is a pattern we’ve seen often.
Through our discussion, I realized that he had equated financial planning with simply choosing the highest-return funds. He was under the impression that selecting top funds from free online platforms was enough to build a solid portfolio. But this belief, while common, is deeply flawed.
One of the most important truths in investing is this — today’s investors do not benefit from yesterday’s returns.
Even Warren Buffett, whom many investors quote often, warned against chasing past performance. Yet most DIY investors continue to follow this approach. They visit websites, filter out the top-performing schemes in each category, and start investing. On the surface, it seems logical. But this method can be one of the riskiest ways to select mutual funds.
Let’s understand why.
Why Past Performance Alone Is Not Reliable
To see the volatility of fund rankings, let’s look at the quilt chart of large-cap mutual funds over the years.
| 2025 YTD | 2024 | 2023 | 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | ||||
| SCHEME NAME | CATEGORY | NAV DATE | Rank | Rank | Rank | Rank | Rank | Rank | Rank | Rank | Rank | Rank | Rank | Top 5 (Times) |
| DSP Top 100 Equity Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 1 | 2 | 9 | 17 | 25 | 23 | 6 | 14 | 20 | 9 | 19 | 2 |
| Mahindra Manulife Large Cap Fund (G) | Equity: Large Cap | 30/04/2025 | 2 | 24 | 22 | 14 | 6 | 19 | 1 | |||||
| ICICI Pru Bluechip Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 3 | 10 | 6 | 3 | 7 | 17 | 18 | 11 | 8 | 4 | 14 | 3 |
| HDFC Large Cap Fund (G) | Equity: Large Cap | 30/04/2025 | 6 | 27 | 2 | 2 | 9 | 24 | 21 | 6 | 9 | 1 | 23 | 3 |
| UTI Large Cap Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 4 | 28 | 26 | 23 | 5 | 3 | 16 | 7 | 14 | 11 | 15 | 2 |
| Axis Bluechip Fund (G) | Equity: Large Cap | 30/04/2025 | 9 | 17 | 29 | 28 | 23 | 2 | 1 | 1 | 3 | 22 | 17 | 4 |
| SBI Blue Chip Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 5 | 25 | 18 | 6 | 15 | 8 | 13 | 21 | 13 | 8 | 1 | 1 |
| Aditya Birla SL Frontline Equity Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 7 | 13 | 16 | 9 | 10 | 13 | 20 | 15 | 11 | 5 | 12 | 0 |
| Mirae Asset Large Cap Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 10.5 | 22 | 28 | 15 | 12 | 15 | 9 | 10 | 1 | 3 | 4 | 3 |
| LIC Large Cap Fund (G) | Equity: Large Cap | 30/04/2025 | 20 | 16 | 30 | 22 | 17 | 14 | 4 | 5 | 19 | 16 | 20 | 1 |
| Canara Robeco Bluechip Equity Fund (G) | Equity: Large Cap | 30/04/2025 | 10.5 | 8 | 21 | 18 | 16 | 1 | 3 | 2 | 10 | 19 | 16 | 3 |
| Tata Large Cap Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 13 | 20 | 12 | 12 | 3 | 21 | 11 | 19 | 15 | 14 | 10 | 1 |
| PGIM India Large Cap Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 8 | 30 | 27 | 16 | 24 | 18 | 7 | 17 | 18 | 15 | 8 | 0 |
| Bajaj Finserv Large Cap Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 17 | 0 | ||||||||||
| Motilal Oswal Large Cap Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 12 | 0 | ||||||||||
| Nippon India Large Cap Fund (G) | Equity: Large Cap | 30/04/2025 | 19 | 7 | 1 | 1 | 4 | 25 | 22 | 9 | 2 | 17 | 11 | 4 |
| Edelweiss Large Cap Fund (G) | Equity: Large Cap | 30/04/2025 | 16 | 14 | 10 | 11 | 18 | 6 | 14 | 3 | 6 | 20 | 13 | 1 |
| Kotak Bluechip Fund (G) | Equity: Large Cap | 30/04/2025 | 15 | 12 | 17 | 13 | 11 | 9 | 8 | 13 | 16 | 12 | 5 | 0 |
| Sundaram Large Cap Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 18 | 29 | 25 | 8 | 13 | 0 | ||||||
| Franklin India Bluechip Fund (G) | Equity: Large Cap | 30/04/2025 | 14 | 11 | 24 | 24 | 1 | 16 | 23 | 18 | 21 | 6 | 9 | 1 |
| WhiteOak Capital Large Cap Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 21 | 1 | 15 | 1 | ||||||||
| Bandhan Large Cap Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 22 | 5 | 8 | 25 | 14 | 5 | 15 | 22 | 5 | 7 | 22 | 0 |
| Groww Large Cap Fund (G) | Equity: Large Cap | 30/04/2025 | 24.5 | 23 | 19 | 5 | 27 | 22 | 10 | 12 | 7 | 10 | 6 | 0 |
| Union Largecap Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 23 | 26 | 20 | 21 | 8 | 11 | 12 | 23 | 0 | |||
| Taurus Large Cap Fund (G) | Equity: Large Cap | 30/04/2025 | 27 | 9 | 23 | 4 | 26 | 20 | 19 | 24 | 22 | 21 | 7 | 1 |
| ITI Large Cap Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 28 | 18 | 13 | 20 | 22 | 0 | ||||||
| Invesco India Largecap Fund (G) | Equity: Large Cap | 30/04/2025 | 24.5 | 3 | 5 | 26.5 | 2 | 12 | 17 | 8 | 17 | 13 | 2 | 3 |
| Baroda BNP Paribas Large Cap Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 26 | 4 | 11 | 7 | 21 | 7 | 2 | 20 | 4 | 23 | 3 | 4 |
| JM Large Cap Fund (G) | Equity: Large Cap | 30/04/2025 | 31 | 15 | 4 | 10 | 19 | 4 | 24 | 4 | 23 | 18 | 18 | 3 |
| HSBC Large Cap Fund (G) | Equity: Large Cap | 30/04/2025 | 29 | 6 | 14 | 19 | 20 | 10 | 5 | 16 | 12 | 2 | 21 | 1 |
| Bank of India Bluechip Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 30 | 21 | 3 | 26.5 | 1 | |||||||
| Quant Large Cap Fund Reg (G) | Equity: Large Cap | 30/04/2025 | 32 | 19 | 7 | 0 |
In 2015, SBI Bluechip Fund was the top-performing large-cap scheme with a 7.86 percent return by December 31. Based on this performance, many investors might have chosen it at the beginning of 2016. However, by the end of 2016, the fund’s ranking slipped to 8. In 2017, it dropped further to 15. By 2018, it was ranked 21 out of 24 schemes.
Similarly, in 2016, HDFC Large Cap Fund delivered a 7.82 percent return and topped the list. Investors who picked this fund in 2017 thinking they were investing in a winner would have been disappointed. In the following years, its ranking fell consistently, reaching 24 out of 25 schemes by 2020.
This pattern is not an exception. In fact, from 2015 onwards, very few schemes have remained in the top five for any sustained period. This clearly shows that relying solely on recent performance to select mutual funds is a defective strategy.
That said, we’re not suggesting that past performance should be ignored altogether. It can be a useful indicator — but only when combined with other qualitative factors.
What Should You Look at Beyond Returns?
Here are some crucial aspects investors must consider when evaluating a mutual fund:
- Quality of Fund Management
Instead of jumping straight to returns, start with the people behind the fund. The experience and stability of the fund management team matters. Check whether the team has been consistent or if there has been frequent churn. A high turnover could signal deeper issues within the fund house.
It’s equally important to understand the investment process followed by the fund house. A well-defined, consistent, and disciplined process at every level of decision-making indicates a higher probability of sustainable performance.
- Attribution Analysis
If a fund has outperformed its peers, ask why. Attribution analysis helps break down the reasons behind a fund’s success or failure. Was it due to strong stock selection? Sector allocation? Or was it simply luck?
A few years ago, we did an attribution analysis for a fund that had recently outperformed. We found that its entire success was driven by a single stock that delivered more than 10 times the return during that period. Without that one stock, the fund’s overall performance was very average. Based on this insight, we decided not to invest. In the following years, the fund indeed underperformed.
This kind of deep analysis helps avoid being misled by temporary spikes in performance.
- Active Share
Many actively managed funds closely mimic their benchmark indices with minor variations. This strategy might help them stay close to the benchmark, but it defeats the purpose of active management. If the fund is essentially copying the index, why not just invest in a low-cost passive index fund?
Active share measures how different a fund’s portfolio is from its benchmark. A higher active share indicates that the fund manager is making distinct choices and taking active calls. This metric is crucial in identifying truly active funds worth considering.
In Conclusion
Selecting mutual funds purely on the basis of recent performance is a risky shortcut. Funds that shine today can easily fall to the bottom of the rankings tomorrow. The investment landscape changes constantly, and a good decision requires more than a list of last year’s winners.
What you need instead is a clear and detailed fund selection process. That process must go beyond numbers and dive into the quality of fund management, underlying strategies, attribution insights, and active share.
In investing, shortcuts rarely lead to success. True financial planning is not about chasing performance — it’s about understanding the why behind the numbers.
And that’s how you build a portfolio that lasts.