You don't have to invest in the 'top-performing' mutual fund

Summary: It’s tempting to think the top-performing fund is the one you should own. But in investing, the shiniest trophy can hide the sharpest edges. From hidden risks in “safe” funds to the costly trap of chasing winners, here are five reasons why picking the latest chart-topper could leave you poorer — and what to do instead.

For many investors, the first instinct when choosing a mutual fund is to search for the “best performer”. It sounds logical. If a fund has topped the charts recently, surely it’s the one to own?

The truth is, chasing the latest winner is one of the easiest ways to disappoint yourself in the long run.

So, here’s why picking the “best” mutual fund, as defined by recent returns, may not always be the smartest move.

1. The best fund may not be the best for you

Performance numbers tell you what a fund has done, but not how it got there. And the way a fund earns its returns can make a huge difference to your investing experience.

Take large-cap funds, for example. By regulation, they can invest up to 20 per cent of their assets in the riskier mid- and small-cap segments. While, on average, large-cap funds are keeping only around 2-3 per cent in small caps, some managers push that limit for an extra performance kick.

Consider these examples: as of June 2025, Motilal Oswal’s large-cap scheme had 9.53 per cent of its investors’ money in small caps, LIC’s had 6.47 per cent and Bank of India’s had 6.04 per cent, substantially more than the category average.

This approach can pay off when smaller companies are rallying, and indeed, some such funds have done well in recent rankings.

But if you picked a large-cap fund expecting a relatively low-risk portfolio, you may be in for a rude shock. Because a fund with an aggressive small-/mid-cap tilt can swing more sharply, and that extra volatility might prompt you to panic and exit at exactly the wrong time, locking in losses.

Therefore, you should be aware that high returns often come with high volatility. If that volatility isn’t within your comfort zone, the “best” fund for someone else could end up being the worst choice for you.

2. Past performance doesn’t guarantee future results

That disclaimer you see in every mutual fund ad exists for a reason. Top performers in one period often underperform in the next.

Funds can shine in specific market conditions. For example, sectoral and thematic funds in a conducive environment, but those same conditions don’t last forever. Jumping in after a strong run can mean buying at a peak, right before a slowdown.

3. Consistency beats short-term spikes

A fund that ranks in the top 25 per cent (top quartile) of its category year after year can be far more valuable than one that grabs the top spot one year and drops to the bottom the next.

Long-term investing rewards steady compounding, not flashy one-year returns.

4. Switching too often costs you

Every time you change funds to chase a new leader, you risk:

• Exit loads (if applicable)
• Short-term capital gains tax (for equity funds held under 12 months)
• The lost compounding of money that’s out of the market during the switch

Frequent switching also adds unnecessary complexity to your portfolio.

5. Diversification matters more

A single “best fund” won’t protect you from every market cycle. A balanced mix — large-cap for stability, mid/small-cap for growth, debt for cushioning — reduces the risk of being caught on the wrong side of a market shift.

The smarter alternative

Instead of chasing recent winners:

• Choose funds with consistent, above-average performance over multiple periods
• Match the fund’s risk profile with your own comfort level
• Build a diversified portfolio that can handle different market conditions
• Stick to your plan and let time, the biggest wealth-building factor, work in your favour

At Value Research Fund Advisor, we focus on exactly that. Here, you don’t just get a list of funds, you get:

• Expert, unbiased fund recommendations that have stood the test of time
• Clear, easy-to-follow portfolio plans for every goal and risk level
• Alerts when it’s time to make a change, so you’re never left guessing
• No jargon, just clarity, all backed by 30+ years of mutual fund research

Check Fund Advisor Today

Also read: The second fund most long-term investors should have