Investing in Best Mutual Funds | Should You Invest in Top Mutual Funds based on Last Year's Returns?

Most Investors find investing in the previous year's top-performing mutual funds a viable option, but is it? In this video, ETMONEY's Shankar Nath takes you through a data-rich study to understand how practical and profitable is this modern-day practice of selecting the best mutual funds of yesteryears under the assumption that they will continue to achieve their previous glories.

What's covered in this video?
00:00 Introduction
00:45 Chasing Past Glories & Outcome Bias
02:26 ETMONEY Study
09:11 Two More Scenarios
11:52 How Not to Chase Performance

👉 CHASING PAST GLORIES AND THE OUTCOME BIAS

Past performance is no guarantee of future results. We've heard this before and it won't be wrong to say that each of us understands that future mutual fund performance is impossible to predict. And yet, tens of thousands of mutual fund investors operate under the powerful grips of an outcome bias.

An outcome bias arises when a decision is based on the outcome of previous events, without any regard to how those past events developed. This distortion of the truth creates a situation where when a good decision goes bad, it is promptly treated as a sign of poor decision making. And if a potentially wrong decision turns positive although it might be pure luck, it is treated as a sign of superior decision making.

It is this distorted view of reality that often leads to many investors to become performance chasers, which means they often sell their holdings in slow performing mutual funds and reinvest the proceeds into recent winners.

👉 ETMONEY STUDY

We shortlisted 75 mutual funds that had at least 10 years of performance history under their belt and a minimum AUM of ₹500 crores. We ranked these mutual funds according to the returns generated by these schemes.

We looked at the following 6 scenarios:

Scenarios 1 - how would a portfolio have performed if one were to buy only the top 3 funds every year? This strategy of chasing the top 3 rankers of every year for the last 9 years, gives us an annualized return of 12.6%.

Scenario 2 - how would a portfolio have performed if one were to buy funds that were ranked 25th, 26th and 27th? This strategy of chasing the high mid rankers would have yielded an annualized returns of 9.5%.

Scenario 3 - how would a portfolio have performed if one were to buy funds that were ranked 50th, 51st and 52nd? This strategy of investing in the previous year's low mid rankers would have delivered an annual returns of 9.3%.

Scenario 4 - how would a portfolio have performed if one were to buy funds that were ranked 73rd, 74th and 75th? (i.e. the lowest ranked funds). This strategy would, surprisingly, have done quite well and would have delivered an annualized return of 10.9%

Scenario 5 - Now, in real life, many investors tend to have a trading mentality i.e. they frequently buy and sell mutual funds at the click of a button. The scenario we are studying here is if we buy ranks 1, 2, or 3 … and we sell as soon as the fund gets ranked below the midpoint i.e. the scheme is ranked 40 or below. In other words, we buy when the rank is high and we sell when the ranking goes below the midpoint. We computed that this buy-sell practice did not yield much of a gain with an XIRR of 12.9%.

Scenario 6 - In this final scenario, we simply invest in an index fund rather than an actively managed fund. The benchmark of choice here is the Nifty 200 TRI. This strategy would have given an annualized return of 12.2%

👉 HOW TO REDUCE BEST MUTUAL FUNDS PERFORMANCE CHASING

We spoke about three simple yet effective tips that one can apply starting today and which’ll go a long way in improving your investing practices.

Tip 1 - Realize the realities of investing

Remember, the world’s best investors recognize that they are as likely to make mistakes in their stock selection.

Tip 2 - Add more filters in your mutual fund selection.

Performance is one variable. There are many more variables one should look at which includes risk scores, fund volatility, its consistency, benchmark performance, category performance etc. A great way to do this is to use the ETMONEY Ranking and Rating feature that is available for all schemes.

Tip 3 - Go for passive investing through index funds.

Index funds ensure that you are always achieving benchmark returns and dont have to worry about the changing and tracking different mutual funds.

Video Credit :
The Art of Investing | François Rochon | Talks at Google

#ETMONEY #TopMutualFunds #BestMutualFund

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[ETMONEY]

Small correction in the opening 5 seconds. Chelsea FC has now seen 16 managerial changes with Super Frankie Lampard given the sack on 25.01.2021 🤦‍♂️

[vsubramanya]

Truly appreciate the time and effort the team has put in and the way the analysis is beautifully presented. thanks everyone of the ET team for the insight full video

[girishjagdale]

This is best video ever made on MF. Every MF investor should watch it!

[abhijitdebnath]

If we develop a habit of index investing, I believe it will help us when we get older when analyzing funds/stocks become more difficult, and probably the future will be more complicated and noisy. Moreover, our next generation could fit easily with this approach as Index investing is undoubtedly the future.

[ramamoorthyganga]

Dear Sir, I cant able to extend the word thank you enough, for your work and time you put in to educate the people. With all honesty the way you are presenting and the examples which comes along with it is impeccable. Definitely Mr Shankar Nath presentation, there shouldnt be any thumbs down button...I mean it should be removed. The people who score thumbs down on Mr shankar nath videos doesnt appreciate the time and the effort which goes in...Thank you and hats off to you sir...Keep going...love your videos...

[Anic]

Insightful Video. Moral of the story is Top rank MF and Index funds gives almost similar returns. So choose wisely.

[tanujbhattacharyya]

It shows, how data can be used to come to a meaningful conclusion if analysed properly. Excellent!

[vikrantbora]

Well researched but what i liked the most is how you have presented. You were concise, clear and at the same time very informative

[debarghyaroy]

One of the best content creators among finance related videos in India. 👍🏼

[sanjaychiplunkar]

Very informative video. The 10 year return data for various ranks is an eye-opener. Thanks a lot.

[anjanaysaxena]

ET money is the first platform I used to invest, and its rankings, star indicators for performance, SIP calculators along with its great UI really helped me. Thanks for this video! Loved the Chelsea exhibit 😂 It's not a sprint, it's a marathon!

[kushallakhani]

You data based research is most appreciated and the ET money app is most useful in decision making.

[manishjha]

I m using et from last 3 year, but saw this channel today. N the video is well researched, really appreciable n helpful.

[rhythmsaidha]

Thanks Shankar & the ET Money team for nicely delineating the 'performance chasing' mindset. I agree, Index funds should be an important part of one's portfolio.

[YubarajRoy]

I have become a fan of your Shankar Sir. You explain important and complex things the easiest way possible. I look forward to your videos every week.

[amritsinghca]

Would like to run a scenario by taking ranking on the basis of last 3 and 5 years returns instead of last year performance. What would be the outcome. Will be happy if you present this

[axt]

Excellent inputs on Mutual funds investment , should be seen by people who invest or are planning to invest in Mutual funds. 👍

[deepakshukla]

Best place to learn about Mutual Funds.

[LalitPatilcasper]

This video is gold! Thank you ET Money for this

[neeshantupadhya]

Great insights. One question: is there a preferred SIP OR is there a good way to select SIP dates? Spread it out to weekly, monthly, start of the month, mid month or near expiry of series. Is it all a draw of straws, or does history and statistics tell us anything? Of course: past performance may not repeat :)