Let Bygones Be Bygones

Let Bygones Be Bygones

The Pesawala Funda

Investors often chase equity mutual funds based on their recent performance, but this approach carries risks and may not lead to the best outcomes.

Key Takeaways

(1) Many DIY investors and financial advisors pick funds based on past short-term performance, leading to concentrated bets.
(2) The success of a fund over several years might often be due to luck, not just the fund manager's skill.
(3) For example, Quant Mutual Fund saw huge asset growth following strong returns, but this “winning streak” might not last or could be coincidental.

The Probability Fallacy

(1) With hundreds of equity mutual funds, statistical probabilities alone mean a few will outperform for several years purely by chance.
(2) Outperformance over six consecutive years could easily happen for a handful of funds by luck alone.

Analyzing Performance

(1) It’s difficult for outsiders to determine if outperformance is due to luck or skill, making deep analysis challenging.
(2) Past performance is not a reliable indicator of future results, as stated in mutual fund disclaimers.
(3) Long-term performance (10+ years or more) and rolling returns (annualized averages across market cycles) are more meaningful ways to assess funds, but data is hard to find for most schemes due to the industry’s youth.

Practical Investment Principles

(1) Diversification is crucial (you must always avoid allocating more than 20% of investments into a single equity mutual fund scheme to limit potential losses if performance reverses).
(2) Consider index funds and ETFs for broad market returns with lower risk of underperformance, as these track overall market indices like Nifty 50.

Conclusion

(1) Avoid chasing short-term past performance.
(2) Focus on long-term results, use rolling returns if available, diversify your investments, and include index funds or ETFs for reliable long-term returns.

Reference Article: [Click Here]

- Jishnu Chatterjee,

October 31, 2025.