Typically, when we begin our investing journey, most of us probably go online and search for something like “best mutual funds for long-term investment,” “best mutual funds for SIP,” or “best-performing mutual funds in India.”
It is a perfectly natural place to start. We want to make the right investment and earn good returns. And if one mutual fund has delivered much better returns than another, why wouldn’t we choose it?
The purpose of this article is not to be contrarian for the sake of being contrarian. If a fund consistently delivers better returns, that is obviously valuable.
The real question is: Is it possible to pick the best-performing fund year after year throughout an investing journey that could last several decades? And even if it were possible, is it actually necessary?
Can You Really Pick the Best-Performing Mutual Fund Every Year?
Suppose you look at mutual-fund performance today and find that Fund A has been the best performer over the last year. You invest in Fund A.
A year later, Fund B is now at the top of the rankings. What do you do? Do you move from Fund A to Fund B?
Then perhaps another fund becomes the winner the following year.
If you keep following this approach, your investment strategy gradually becomes: find last year’s winner and try to identify this year’s winner.
But there is a fundamental problem. Knowing which fund performed best yesterday is easy. Knowing which fund will perform best tomorrow is much harder.
And the challenge becomes even greater when we extend the exercise over 10, 20 or 30 years. You don’t need to pick one good fund once. You need to keep making good decisions repeatedly throughout your investing journey.
That is a very different challenge.
Can You Predict Which Mutual Fund Will Perform Best Next Year?
The same thinking applies beyond mutual funds.
You may read that the market is expected to rise 5% tomorrow. Or that a particular sector is expected to outperform next year. Or that interest rates are likely to fall and a particular category of funds will benefit.
There will always be predictions. Some will turn out to be right. The problem is knowing which ones will be right before they happen — and doing that consistently over many years. Read What will you do if you know markets will rise tomorrow
Investing becomes very different when your strategy depends on getting these predictions right.
Your financial goal, however, doesn’t require you to predict what the market will do tomorrow.
The objective isn’t to predict the market correctly every year. It is to build a financial plan that gives you the best chance of achieving your goals without requiring you to predict the market correctly every year.
That is a very different way of thinking about investing.
What Does Chasing Mutual Fund Returns Cost?
The obvious attraction of switching funds is the possibility of earning a higher return. But the calculation shouldn’t stop there.
If you repeatedly sell one investment and buy another, there can be tax implications from transactions, depending on the investment and your circumstances.
There is also the cost of constantly monitoring your investments. You need to keep asking: Is my fund still performing well? Why is another fund doing better? Should I switch? Is this underperformance temporary? Is the new fund likely to continue outperforming?
Once you start comparing your fund with whatever is currently at the top of the rankings, it becomes very easy to feel that your investment is doing badly simply because another fund did better.
This can create a cycle:
Fund underperforms → you worry → you switch → another fund becomes attractive → you switch again.
The portfolio becomes more complicated, while the financial goal hasn’t changed at all.
And there is one cost that rarely appears in the calculation: your time and attention.
Why Your Investment Goals Matter More Than Picking the Best Fund
This is where I think we sometimes approach investing from the wrong direction.
We start with:
Which is the best mutual fund?
Perhaps we should start with:
What am I investing for?
Personal finance starts with you. What are your goals? How much money will you need? When will you need it? How much can you invest? What level of risk can you take? What asset allocation is appropriate?
Once you answer those questions, you can decide which investments can play the required role in your portfolio. The mutual fund comes after the plan, not before it.
Your objective isn’t to own the mutual fund that topped the rankings this year. Your objective is to accumulate enough money to achieve your goals.
That means decisions such as these matter:
- Are you investing enough?
- Are you investing for long enough?
- Is your asset allocation appropriate?
- Are you taking an appropriate level of risk?
- Are you increasing your investments as your income grows?
- Are you staying invested through market cycles?
These decisions can matter far more to your financial outcome than constantly trying to move into last year’s best-performing fund.
This is also why a SIP by itself isn’t a financial plan. A SIP is simply a method of investing. You can run a SIP for decades and still fall short of your goal if the amount invested, time horizon or asset allocation isn’t appropriate.
The same principle applies to mutual-fund selection.
Picking a good fund doesn’t compensate for a poorly designed financial plan.
Do You Really Need to Beat the Market?
Let’s say you could identify a fund that consistently generates an additional 2%, 5% or even 7% compared with a broad-market index. That additional return can obviously make a significant difference over a long period.
So this isn’t an argument that alpha doesn’t matter. It does.
The question is whether an individual investor can reliably identify and capture that alpha throughout their entire investing journey.
You need to identify the right fund, know when to hold it, distinguish temporary underperformance from a genuine deterioration and decide when — or whether — to switch. Then you have to repeat the process again and again for decades.
If you can genuinely do that successfully, the additional return is valuable. But for most investors, the more realistic question is:
Do I need to maximise every possible percentage point of return, or do I need a strategy that gives me the best chance of achieving my financial goals?
Those aren’t necessarily the same thing.
Compounding, Simplicity and Long-Term Investing
One of the biggest advantages an investor has is time. When money compounds for decades, the returns generated by your existing investments can themselves generate returns.
Of course, a higher return over a long period will generally produce more wealth. But there is a difference between earning a higher return and spending your investing life trying to identify the investment that will earn the highest return.
The second requires considerably more effort, decision-making and behavioural discipline. And there is no guarantee that the effort will produce the expected result.
For many investors, a simple, diversified investment strategy may be more useful than constantly searching for the next winner. A broad-market index fund can be one way of doing this. A diversified fund such as a flexi-cap fund may be another approach for someone who prefers active management.
The point isn’t that one category is universally better. The point is that you may not need to chase additional returns if doing so makes your investment journey significantly more complicated.
Every additional decision takes time and creates another opportunity to make a mistake. More importantly, investing should not become something that occupies your attention every day.
If a simpler approach gives you the best chance of staying invested, maintaining the right asset allocation and achieving your goals, that simplicity has value.
And perhaps the biggest benefit is something that doesn’t show up in your portfolio statement: you get your time back.
How Should You Choose a Mutual Fund Instead?
This doesn’t mean you should ignore mutual-fund performance. Performance is an important part of evaluating an investment. But it shouldn’t be the only question, and it shouldn’t necessarily be the first question.
Instead, start with:
What is my goal?
Then consider:
- What is my investment horizon?
- What asset allocation do I need?
- What role does this investment play in my portfolio?
- Is the level of risk appropriate?
- Is the investment sufficiently diversified?
- Can I stay invested when it underperforms?
- Is the portfolio simple enough for me to maintain?
- Does the investment continue to make sense for my overall plan?
Only then should performance become part of the decision.
Because the best-performing fund isn’t necessarily the best fund for you.
And this doesn’t mean you should never change your mutual funds. Your financial goal may change. Your time horizon may change. Your asset allocation may no longer be appropriate. The investment may no longer fit the role you originally assigned to it. There may also be a meaningful change in the fund or its strategy.
These can all be valid reasons to review or change an investment.
The point isn’t “never change your mutual funds.”
The point is:
Don’t change simply because another fund performed better last year.
That is a very different approach.
Final Thoughts
The next time you search for “best-performing mutual funds”, perhaps pause before selecting the fund at the top of the list.
Ask yourself:
Best for what?
Best for which goal? For what time horizon? For what level of risk? For what role in my portfolio?
And most importantly:
Do I need to find the best-performing fund, or do I simply need an investment strategy that gives me the best chance of achieving my goals?
Because personal finance is not about proving that you can beat everyone else. It is about building enough financial security to live the life you want.
If a simple, diversified investment approach, the right asset allocation, investing the right amount and giving your money enough time to compound can give you the best chance of achieving your goals, perhaps that is more valuable than spending years trying to identify the next winning mutual fund.
You don’t have to spend your investing life trying to prove that you are smarter than the market, your friends or the person next to you.
After all, the purpose of managing money isn’t to spend your life managing money.
It is to use money to live your life the way you want.
Still thinking about which investment is right for you? Start with the goal.
Read on: Rethink Personal Finance — Goal Planning
Disclaimer: This article is intended for educational and informational purposes only and reflects my personal research and opinions. It should not be considered personalized investment, tax, or legal advice. Please consult a qualified professional before making financial decisions. Read the full Disclaimer.