Don’t Drive by Looking in the Rear-view Mirror

“Every fund factsheet, website, and research magazine remind us — past performance is no guarantee of future results. Yet, the most common method of investing in mutual funds still remains looking at past returns, star ratings, and rankings. It feels intuitive to believe that something which delivered strong results in the past will continue to do so. But this very assumption often leads investors into traps — because markets, cycles, and strategies change.” [EasyDNNnews:PaidContentStart]

Picking a fund based only on past rankings is like trying to catch the wind. Just as you would not drive a car only looking at the rear-view mirror, you should not make investment decisions solely by looking backwards. 

Chasing past performance often leads to accidents. You can see Rank 1 fund of 2010-12 became Rank 103 in 2013-15 and so on. 

So, what should investors look at instead? The answer is Consistency + Style + Risk + Costs + Quality + Fund House process and not just past performance. 

Consistency: Rahul Dravid is remembered as Mr. Dependable for his consistent performance across decades. Similarly, in investing, consistency matters more than one-off high returns. 

Most investors rely on point-to-point returns (1, 3, 5, 10 years), which can be misleading. For example, today’s 5-year returns look attractive because five years back (2020) was a Covid-crash low. If you checked on March 23, 2025, the ‘5-year return’ would reflect investing at the absolute market bottom — something very few actually did. 

Rolling returns are a better metric. Unlike the few point-to-point figures, rolling returns provide thousands of observations that reveal a fund’s consistency across cycles. The Nifty 50 Index Fund returns 17.83 per cent p.a. over 5 years as of August 23, 2025. Rolling 5-year returns (2015-2025) range from 6 per cent to 23.7 per cent p.a., averaging 15 per cent p.a., illustrating consistency. 

Style: Different funds shine in different market environments: Axis Funds thrived during Growth cycles. ICICI & HDFC excelled during Value cycles. Quant performed strongly in Momentum phases. Lesson: do not chase the recent winner; understand fund manager style. Each style works at times, struggles at others. A well-constructed portfolio mixes styles or fits your philosophy and risk appetite. Investors can also diversify with different styles to reduce duplication and avoid over-diversification of one’s portfolio. 

Risk Adjusted Returns: There can be funds which give most returns during a certain time and are the worst performers at certain periods. Average can be same for both the funds on paper, but one gives a roller-coaster experience with high risk, while the other gives smoother, more reliable performance. Metrics like Sharpe Ratio, Sortino Ratio, Information Ratio give a better picture of funds with better Risk Adjusted Returns. 

Costs: Costs do matter, but in equity funds their influence is usually outweighed by the broader range of returns. While still an important metric, a well-managed fund with strong performance can comfortably absorb its expenses. When two funds are otherwise comparable in consistency and style, selecting the one with lower costs can give investors a clear long-term advantage. 

Quality: Beyond returns, the quality of a fund’s portfolio is a critical parameter. A fund might show good past performance, but if its portfolio is concentrated in a few overvalued stocks or cyclical sectors, it carries higher risk. Quality is reflected in factors like the strength of underlying businesses, diversification across sectors, liquidity of holdings, and whether the portfolio is aligned with the fund’s stated style. A high-quality portfolio, even if it does not always top the charts, tends to deliver steadier returns, recover faster during downturns, and protects investors from unnecessary shocks. 

Fund House Process: Fund houses that depend heavily on a star fund manager see their performance rise and fall with that individual’s success. On the other hand, there are fund houses where the strength lies in the process — where, irrespective of who joins or leaves, the investment philosophy remains consistent and keeps evolving. Such process-driven fund houses offer better reliability and long-term confidence to investors. 

In a world of endless choices, do not chase funds or change funds on the basis of past performance. Past performance is just the tip of the iceberg. The real edge lies in checking consistency, style, risk, quality, and process. And remember, past performance is no guarantee of future results. 

The writer is CFP & Founder – Trustedarms Finserv LLP • Email : [email protected] • Website: www.trustedarms.com

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