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-term performers beat the index 79 per cent of the time. That gap is significant. It shows that occasional leadership does not translate into durable outperformance. A repeatable process does.

4) What if you hop from one winner to the next each year?

Lastly, we also simulated a switching strategy. Suppose an investor put Rs 10 lakh at the start of 2016 into the previous year’s best-performing flexi-cap fund. At the start of every new year, the entire accumulated corpus was shifted into the latest calendar year topper. This continued until December 2025.

A long-term capital gains tax of 12.5 per cent on gains (after Rs 1.25 lakh exemption) was also applied each time the investment was sold at the end of the year. After accounting for taxes annually, the annualised return was 14.5 per cent.

Now compare this with a simple alternative.

If the investor had stayed invested in any of the top five 10-year performers (trailing winners analysed above) and paid capital gains tax only once at the end of 2025, the post-tax annualised return would have ranged between 14.9 per cent and 16.2 per cent, generating a sizable difference in the corpus. See the table below.

The gap is meaningful. Chasing one-year winners and frequently switching to them not only failed to improve returns, it also triggered recurring tax outflows that reduced compounding. On the other hand, not worrying about being invested in the latest outperformer and staying put in one fund of your choice yielded better outcomes. 

What investors should do

Selecting funds still matters. But the objective should not be to predict which fund will continue to be at the top. Instead, focus on process and consistency.

• Examine at least five to seven years of performance across different market conditions.
• Look at how frequently the fund beats the benchmark on a rolling return basis.
• Assess downside behaviour, not just peak year returns.
• Avoid frequent fund hopping based on annual rankings.

The evidence from flexi-cap funds over the past decade is clear. The market rewards discipline and consistency more than calendar-year brilliance.

Which funds should you own?

Staying invested takes discipline but that discipline pays off only when your money goes into the right mutual fund. To assist you with picking the fund that’s right for you and is suited for your goals and horizon, our analysts at Value Research Fund Advisor rigorously analyse mutual funds on several parameters. A fund makes it to our recommendation only after passing these checks.

Explore Fund Advisor to check which funds find a place in our recommendations.

Try Fund Advisor

Related Resources

Further reading

How to compare mutual funds: Key metrics for smart investment decisions. A step-by-step framework for evaluating funds beyond headline one-year returns – covering rolling returns, risk-adjusted measures, and how to use VRO tools to assess consistency and cost. Updated January 2026.

How to pick the right mutual funds for 2026: A process-first guide that explains how to choose funds based on goals, risk tolerance, and long-term staying power – not by chasing top-performing fund lists. Published December 2025.

6 mutual fund return metrics explained: Absolute, CAGR and more. Explains absolute return, CAGR, XIRR, trailing returns, and rolling returns – the vocabulary investors need to interpret fund performance tables without being misled by cherry-picked figures.

Frequently asked questions (FAQs)

1) Does the past performance of a mutual fund predict future returns?

No, it does not – at least not in the way most investors hope. Data shows that consistently chasing the best mutual fund results in a behaviour gap – investors end up buying high and missing the compounding that rewards patient holders.

VRO's own 10-year analysis of flexi-cap funds shows that no single fund held the top rank for two consecutive years across the entire decade. In five of those 10 years, the prior year's best fund did not even stay in the top quartile.

Academic research on Indian equity mutual funds adds important nuance: mutual funds show no persistence in their performance over time, and these results are robust to the choice of performance measure and the investment horizon. Some studies do find short-term persistence at a one-year horizon, but it disappears over longer periods, which is the horizon that matters for wealth creation.

The practical takeaway: a fund topping the one-year chart tells you about last year's market phase, not the manager's repeatable skill. A five-year rolling return win rate against the benchmark is a more reliable signal.

2) Is it a good idea to switch to last year's best-performing mutual fund?

Generally, no data makes the case clear. VRO simulated exactly this strategy: putting Rs 10 lakh into the prior year's best flexi-cap fund at the start of each year from 2016 to 2025, switching annually. After accounting for capital gains tax at each switch, the post-tax annualised return was 14.5 per cent, producing a final corpus of Rs 38.7 lakh.

Staying invested in any of the top five funds by 10-year trailing return (as of December 2025)– and paying tax only once at exit in 2025 – delivered 14.9 per cent to 16.2 per cent post-tax, growing the same Rs 10 lakh to Rs 40.1–44.7 lakh.

Switching mutual funds every year leads to extra costs, tax liabilities, and inconsistent returns. Every annual switch also resets the holding clock on new units, potentially triggering a 20 per cent short-term capital gains tax if you redeem within 12 months of the purchase.

The strategy feels smart – you are always in "the best fund." The data says it is not. Consistency compounds better than rotation.

3) What is a rolling return in mutual funds, and why does it matter more than 1-year returns?

A rolling return calculates a fund's annualised performance across every overlapping period of a chosen length – say, every 5-year window within the last 10 years. When a fund's 1-year, 3-year, or 5-year returns look better or worse than others, it doesn't tell you if the fund has always been better or whether it's just the current point-to-point returns. Since rolling returns look at returns over a period of time, they are better able to capture performance trends and average out swings.

In contrast, the trailing return you see on most fund listing pages – say, "3-year return: 22 per cent" – measures only the change in NAV between two specific dates. If those dates happen to fall during a rally, the number looks excellent. If they straddle a correction, it looks poor. Neither tells you how the fund performs over time.

VRO's analysis of flexi-cap funds over 10 years found that one-year chart-toppers beat the Nifty 500 TRI on a five-year rolling basis just 48 per cent of the time – barely better than chance. Long-term outperforming funds beat it 79 per cent of the time. Rolling returns expose this gap; trailing returns hide it.

You can check rolling returns for any fund on the Value Research fund screener.

4) How does switching mutual funds affect capital gains tax in India?

Every switch – whether between two funds at the same AMC or different fund houses – is treated as a redemption of the first fund followed by a fresh purchase in the new one. When you switch from one debt fund to another (or from any fund to another), it's treated as a sale of the first fund on the switch date. You must pay tax on that "sale." The same principle applies to equity funds.

For equity mutual funds under current rules (Budget 2024, effective 23 July 2024):

• STCG (held 12 months or less): taxed at 20 per cent flat
• LTCG (held more than 12 months): taxed at 12.5 per cent on gains above Rs 1.25 lakh per financial year

Switching from one mutual fund scheme to another is treated as a sale and is taxable. Make such decisions only when necessary.

The compounding cost of this is significant. Each time you switch and pay tax, your invested base shrinks. The remaining corpus was then compounded from a lower starting point. Over 10 years, this drag compounds just as relentlessly as returns – but in the wrong direction.

5) Why do the best mutual funds of one year underperform the next year?

Because one-year returns are heavily shaped by market conditions and sector rotations – not necessarily by fund manager skill. When one segment of the market rallies sharply (say, infrastructure stocks or PSU companies), funds with high exposure to that segment automatically top the chart. When that phase ends, the same funds often revert.

This behaviour, often called performance chasing, is driven by recency bias – the belief that what happened recently will continue to happen. What worked well in 2024 might not work in 2025 due to changes in market cycles, interest rates, inflation, or sector rotation.

The funds that compound wealth over a decade tend to be the ones that stay consistently above average across cycles, not the ones that occasionally dazzle and then disappear from the top 10.

This article was originally published on March 03, 2026.