The Illusion of Top-Performing Funds
A recent dataset from FundsIndia offers a revealing look at mutual fund performance cycles. It analyses how the top 30 funds in one three-year period fared in the subsequent three years. The findings highlight a critical point for investors: past performance is rarely a predictor of future success.
Source : FundsIndia
When Leaders Become Laggards
For instance, the number one fund in 2009–2011 dropped to rank 38 in 2012–2014 (in the above image). The third-best fund in 2009–2011 fell to 31st place in the next cycle. One fund that ranked 23rd went all the way down to 131st. More recently, the top performer of 2019–2021 declined to 43rd position in 2022–2024. The third and fourth-ranked funds during that earlier period dropped to 201st and 126th respectively.
Improvement Is Rare, Decline Is Common
Cases of significant improvement in fund ranking are few and far between. A fund ranked 11th climbing to second place, or one ranked 16th doing the same, are outliers. The majority of top-performing funds either maintain their position or fall. The broader takeaway is that the rankings are highly cyclical and rarely stable over time.
The Trap of Performance Chasing
This cyclical nature leads many investors to shift from one fund to another, chasing returns. A fund performs well → investors flock to it → it underperforms → they move to the next trending fund. This cycle of disappointment keeps repeating, causing many to miss out on the eventual top performers of the next cycle.
Why Long-Term Commitment Matters
Instead of hopping between funds, staying committed to a fund manager, a strategy, and a philosophy over the long term is often more rewarding. If the fund and its approach inspire confidence, sticking with it through underperformance can be more beneficial than constantly chasing short-term success.
A Classic Lesson from Peter Lynch
The Magellan Fund under Peter Lynch outperformed for more than a decade. Yet, the average investor in the fund ended up losing money — not because the fund didn’t deliver, but because people kept moving in and out at the wrong times. This serves as a powerful reminder that discipline often beats reactivity.
Have you ever switched funds too quickly and regretted it? Share your experiences in the comments below! If you found this blog insightful, don’t forget to SHARE it with your friends!
