How To Choose Best Mutual Funds: Don't Fall For Past Performance, Look At These Instead, Says Report

Most investors, especially new ones, instinctively look at the top-performing funds before investing. It feels safe, logical, and is the easiest way to select the best mutual funds to invest. Just pick the winners of the last 3-5 years and hope they continue doing well.

But here’s the uncomfortable truth: past performance often creates a false sense of comfort, and, in many cases, ends up misleading investors; does not even necessarily provide decent returns. Top performers look attractive mainly because they are shining in strong market phases. When the cycle turns or the market leadership changes, the same funds often slip down the rankings. Yet, investors chase them with the assumption that the past guarantees the future. Unfortunately, it doesn’t.

A recent report by PhonePe Wealth Broking, a subsidiary of PhonePe, captures this idea beautifully with a sports analogy. It says: think of any major sports league. The team that wins the championship one season is rarely the guaranteed winner the next year. New coaches come in, team strategies evolve, some players lose form, others get traded, and injuries disrupt momentum. Every season resets the game. The leaderboard is always moving.

Investing is not very different. The list of top-performing mutual funds one year looks quite different a few years later. There is no guarantee that the fund at the top of the table today will remain there tomorrow.

The Data: Chasing Past Mutual Fund Winners Doesn’t Work

The report tested what happens if an investor simply keeps picking the ‘chart toppers’ of the previous period. It looked at the Rank Correlation, which essentially measures whether top-ranked funds from one three-year period (say 2018–20) remain top-ranked in the next three years (2021–23). The results are shown in the chart below.

Think of rank correlation as checking if the leaderboard stays stable or gets reshuffled.

Here’s how to understand the scores:

• +1.0 means a perfect streak. The #1 fund remains #1, #2 remains #2, and so on. The table never moves.

• 0 means total randomness. Like flipping a coin. Past rank tells you nothing about future rank.

• –1.0 means a complete reversal. Yesterday’s winner becomes tomorrow’s loser.

When the report looked at the actual categories and time periods, the results were neither positive nor predictable. Most scores hovered between slightly negative and nil.

In simple words, there is no pattern. No continuity, says the PhonePe Wealth Report. “The top funds of one cycle rarely remain the top funds of the next.” This is the biggest warning for investors who select mutual funds purely based on the latest performance list. The leaderboard keeps shuffling, cycles shift, market preferences evolve. 

New managers may also take over. Small-cap rallies fade, large-cap phases return, global events change flows—everything is fluid.

So, relying on ‘last year’s stars’ is not a strategy. It’s a gamble.

How To Select the Best Mutual Fund to invest for High Returns?

One of the more practical approaches is to look for consistency instead of champion-level outperformance, says the report.

Think again of a sports team. Every league season, the report says, has one champion, but very few investors bet only on that team. Instead, the safer bet—if you had to make one—is on teams that regularly qualify for the play-offs. These are the teams with strong systems, stable coaching, good bench strength, and processes that work across weather and conditions.

They may not win the trophy every year. But they are rarely at the bottom of the table either. And most importantly, they deliver a smoother journey for investors, says the Report.

Why Consistency Matters More Than Outperformance?

Chasing top performers feels tempting. But choppiness, sudden declines, and high volatility are the hidden costs of many ‘chart-topping’ funds.

On the other hand, consistent funds may look boring. They don’t jump 60 per cent in a bull year. They don’t fall apart in a bad one either. They simply keep moving steadily. For long-term wealth creation, this matters far more.

A fund that quietly compounds at a stable pace, protects downside, and avoids big mistakes can take you much closer to your goals than a fund that dazzles one year and disappoints the next.

This is why the report emphasises identifying funds that perform well more often than not, rather than those that perform spectacularly once. The consistent funds will be in a better position to sail you through a long journey and help you accomplish your long term goals in time.