Why Past Top-Performing Mutual Funds Often Disappoint Next
Why Last Year’s Top Funds Often Disappoint
It’s a ritual for many Indian investors: every January, they search for the Best Mutual Funds of the Year. They look for the ones with the biggest, boldest percentage returns and immediately start a SIP. It feels like a safe bet if they won last year, they must be the best, right?
But by 2025, data has shown a different story. Very few funds that rank in the Top 10% in one year manage to stay there the next. In fact, many of them drop to the bottom half of the rankings. This isn't because the fund manager suddenly forgot how to invest. It’s because of a few powerful laws of the financial world that every beginner should know.
The Rubber Band Effect (Mean Reversion)
The most common reason for a performance drop is a scientific principle called Mean Reversion. Think of a rubber band: you can pull it very far in one direction, but eventually, it must snap back to its original shape.
In the stock market, specific investment styles (like IT, Pharma, or Small Caps) often have a Super Year where everything goes right. But these extreme gains are hard to sustain. Eventually, the prices become too expensive, and the fund snaps back to its long-term average return.
The Asset Bloat Problem
When a fund performs exceptionally well, everyone wants in. Thousands of new investors pour billions of rupees into the fund. This is called Asset Bloat.
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The Struggle: When a fund was small (say ₹500 Crore), the manager could easily buy small, high-growth companies.
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The Giant: When that fund grows to ₹50,000 Crore, the manager can no longer buy those tiny companies because they are too small for the fund's new size.
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The Result: The manager is forced to buy the same big, slow-moving stocks as everyone else. The Special Sauce that made the fund a winner disappears.
The Style Cycle
Every fund manager has a style. Some like Value (cheap stocks), others like Growth (expensive but fast-moving stocks).
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The 2024-25 Example: In early 2025, Value stocks in India had a massive rally. Funds that followed a Value style looked like geniuses.
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The Shift: If the market mood shifts to Growth in late 2025, those same Value funds will suddenly look like Losers, even though the manager didn't change their strategy at all.
Comparing the Winner vs. the Consistent Fund
How to Pick a Fund That Won't Disappoint
To avoid the Winners' Trap in 2026, change your search criteria:
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Look for Quartile Consistency: Instead of the Top 1%, look for a fund that has stayed in the Top 25% (First Quartile) for 3 or 5 years straight.
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Check the Fund Manager's Tenure: Has the person who made the fund a winner actually stayed? If the manager left, the stars on the app belong to a person who is no longer there.
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Use the Rolling Returns Tool: On the MO Riise app, look at Rolling Returns instead of Point-to-Point. This shows you the fund's average performance across various market conditions.
Conclusion
Investing is like a marathon. The person who sprints the fastest in the first kilometer often collapses before the finish line. The winner is the one who maintains a steady, sustainable pace throughout the race. Next time you see a 50% return on a fund, don't ask How can I get in? Ask: Is this sustainable? At Motilal Oswal, our Buy Right, Sit Tight philosophy is designed to ignore the short-term sprints and focus on the businesses that will keep winning for a decade.