Should you buy last year's best mutual fund? We tested it

Summary: Ten years of data shows last year’s best fund rarely stays best. We even simulated switching to the latest topper every year. The ‘smart’ move fell behind. See the return gap and winners inside. Siva Prasad Ravirala, a reader of Value Research Online, asks a simple but important question: if funds that top one-year return charts often underperform in subsequent years, what is the point of selecting the best-performing funds in the first place, and what approach should active investors follow? A common mistake investors make is picking mutual funds that top one-year return charts. Recent outperformance often instils hope that the fund may continue its glittering run. Our four data exercises below test whether that belief actually holds over the long term. 1) How often do one-year leaders stay on top? Very rarely. Our analysis of active flexi-cap funds (regular) over the last 10 years shows just how unreliable a single year leadership is. Over the past decade, each year had a different fund at rank one. In other words, across 10 years, there were 10 different toppers. No fund managed to hold its pole position for two consecutive years. More strikingly, in five of the 10 years, the previous year’s best fund did not even remain in the first quartile and slipped into the second, third or fourth quartile. Why does this happen? Simply because market leadership rotates. One year returns are heavily influenced by a market phase. A sharp rally in a segment can push certain funds to the top of the table. That does not automatically signal superior skill. It often reflects style alignment with that specific phase.  What investors should look out for is performance persistence i.e., the tendency of a fund that performed well in one period to continue performing well in the next. 2) Do long-term winners come at the top often? Next we sought to assess if calendar year leadership has any influence in long-term outperformance. So we examined the five best flexi-cap funds by 10-year trailing or point-to-point returns as of December 2025. If annual toppers truly signal skill, these funds should show up near the top more often than not. But they do not. We tracked yearly positions for each of them over the last decade, which gave us 50 ranks in total. Out of those 50, these long-term winners came at the top only three times. Simply put, their long-term outperformance did not come from repeatedly topping the table. It came from steady, above-average performance over time. This distinction matters. Long-term compounding is built on consistency, not occasional spikes. 3) How do one-time winners fare on consistency? To test consistency, we examined five-year rolling returns over the last 10 years for the two groups analysed above: the 10 funds that topped each calendar year vs the top five funds on a 10-year trailing basis. For the uninitiated, rolling returns measure performance over overlapping five-year periods rather than fixed calendar years. It shows how often a fund beats its benchmark across time. The benchmark used for comparison was the Nifty 500 TRI. The 10 calendar year toppers beat the index only 48 per cent of the time on average. In contrast, the five long-te

This article was originally published on March 03, 2026.