Why invest in mutual funds based on past performance

Many investors rely on the past performance of the fund because the past performance of the fund is one of the leading parameters influencing the decision-making of the investors.
Should one invest in mutual funds based on past performance
3 min

Have you ever thought of investing in mutual funds purely based on their historical returns? It is something that most people actually do, but is it really pragmatic? We will look at the mutual funds' past performance, why looking at the historical performance of a fund might not give you the whole picture, and what else you would want to look into before making up your mind with respect to your investment. Besides, it's your hard-earned money that you're going to be investing; if you're going to risk it, you might as well get it right.

Why do investors invest based on past returns?

Investment in mutual funds often becomes a showcase of mutual funds' past performance. This is the general strategy with most of the investors, but why is so much importance attached, especially in India? Let's check out why there is this trend.

  • Historical performance indicator: Many investors rely on the past performance of mutual funds as an easy indicator of what the fund can accomplish. It is a concrete record that can be easily analysed and compared with other funds. Common sense will tell you that if a fund has done well in the past, it will carry on doing well in the future.
  • Media influence: The financial media in India tends to highlight top-performing funds a lot of the time, focusing on their short-term returns. Most of the investors, therefore, if they are not doing research to understand what drives such returns, are influenced by this visibility.
  • The evaluation of past returns is relatively simpler than dissecting complex financial statements or getting onto the prediction of future market conditions. For an average investor, it's way easier to look at numbers that describe growth over years and make decisions based on these data.
  • Peer influence: Most of the persons, while deciding about investment, will take advice from their family, friends, and colleagues. So, the discussion about the mutual fund inside his personal network is likely; funds which are giving good returns are discussed, and there is likely to be a bandwagon effect.
  • Performance chasing: This is the psychological aspect whereby the investor chases the mutual funds' past performance. They observe a fund doing very well, and out of fear of missing similar gains, the performance chaser invests to just catch the high returns wave.

How should you be investing in mutual funds?

The investment in mutual funds must be taken through a defined process. Start by defining your financial goals and gauging your risk tolerance. Investment horizon and risk profile are the two key deciding factors for the choice of funds. To diversify across the various types of funds that are equity, debt, and hybrid, that would help you in mitigating your risk vis-à-vis each one of them. From time to time, you should review and rebalance your investments, keeping in view the changing market conditions and your personal financial goals. Finally, check the track record of the fund manager and the expense ratio of the fund, as this may put huge impacts on your returns. Prudence and caution will enable you to derive the maximum benefits out of mutual fund investments.

Mantras to keep in mind while investing in mutual funds

Here is a strategic approach and some of the key mantras to guide you: remain invested, stay disciplined, diversify across fund types, and consider professional advice towards optimising your portfolio.

Remain invested

  • Long-term perspective: Stay with your investments through gyrating markets if you want to enjoy potential long-term gains. In other words, you allow your gains to grow. Staying invested gives a chance for your earned amount to compound, thus increasing potential returns.
  • Market timing futility: Steer clear of this form of market timing that usually proves futile and fraught with greater risks.

Stay disciplinary

  • SIP (Systematic Investment Plan): Regularly investing a fixed sum to average out the cost of purchase and reduce market timing risks.
  • Goal alignment: All investments should align with clear financial goals to help maintain focus and not make decisions on the basis of prevailing market sentiments.
  • Regular reviews: Periodically, you will have to review your investment portfolio to make sure that it still fulfils your financial goals and matches the risk tolerance at hand.

Do a plan for a variety of mutual funds

  • Diversification: Spread your investments across the different categories of funds to reduce risk and increase the potential return.
  • Risk management: You should customise your mutual fund selection to your risk capacity and invest in a mix of equity, debt, and hybrid funds.
  • Strategic allocation: Use asset allocation strategies to adjust your investment spread according to changing market conditions and personal financial situations.

Help consider

  • Expert advice: Expert investment strategies, offered by financial advisors, will help provide insights to the peculiarities of such a market.
  • Research and resources: Leverage the tools and research content on our investment platform to make informed decisions.
  • Portfolio management: Businesses should consider reviewing and use managed services for the portfolio rebalancing whenever they require adjusting to the market changes effectively.

Disadvantages of relying solely on past performance of a mutual fund

Relying solely on the past performance of mutual funds when making investment decisions is a common practice, but it comes with significant risks. Here are some of the key disadvantages to consider:

  1. Mutual funds' past performance is not a guarantee of future results: This is a standard disclaimer for a reason. Mutual fund returns are influenced by a variety of changing factors including market conditions, economic cycles, and sector-specific issues. What worked well in the past may not necessarily do so in the future.
  2. Market conditions vary: The financial markets are dynamic and the factors that led to a fund's exceptional performance in the past may no longer be present. Economic environments change and what drives one market cycle can be irrelevant in the next. For instance, a debt fund that thrived during a period of falling interest rates may not perform as well when rates rise.
  3. Management changes: Mutual funds' past performance can also be heavily dependent on the fund manager and their team. Changes in management can alter the strategy and performance of a fund. Investing based on past performance without considering a recent change in fund management might lead to unexpected results.
  4. Overlooking Expense Ratios and Fees: Funds that have shown good past performance may come with high expense ratios and fees that can eat into returns over time. Investors focusing solely on returns may overlook these costs, which can diminish net gains.
  5. Performance chasing: Investors often chase high-performing funds, leading to inflows that may not be sustainably managed. This can lead to a dilution of returns as more assets under management can sometimes make it harder to sustain high performance.
  6. Misaligned risk profile: A fund’s past performance might not reflect its risk profile. Investors might find themselves invested in funds with risk levels that do not match their own risk tolerance, potentially leading to uncomfortable levels of exposure during market downturns.
  7. Ignoring better options: By focusing only on past performance, investors might miss out on other promising funds that have the potential to perform well in the current or upcoming market conditions but may not have a long track record.

Factors to be considered while making an investment decision on mutual funds

Investing in mutual funds is a popular choice for many investors in India, but it requires careful consideration of several factors to ensure it aligns with your financial goals and risk tolerance. Here’s a detailed look at the key factors to consider:

  1. Investment goals: Define what you are aiming to achieve with your investment. Whether it’s saving for retirement, your child’s education, or building an emergency fund, your goals will determine the type of mutual fund you should invest in and the duration of investment.
  2. Risk tolerance: Understand your risk appetite. Different mutual funds have varying levels of risk based on their asset allocation. Equity funds are higher in risk with potentially higher returns, suitable for those with a high-risk tolerance, whereas debt funds are generally safer with lower returns, appropriate for conservative investors.
  3. Fund performance: While mutual funds' past performance isn’t an indicator of future outcomes, it can provide insights into how a fund has managed volatility and performed under different market conditions. Look at the long-term performance of mutual funds to gauge consistency, not just short-term gains.
  4. Expense ratio and fees: Check the expense ratio of the fund, which is the annual fee that the fund house charges for managing the money. A lower expense ratio can significantly affect net returns, especially over long periods.
  5. Fund management: The track record and stability of the fund management team are crucial. Experienced fund managers are likely to navigate market ups and downs more effectively than those less experienced.
  6. Asset allocation: The composition of investments in a mutual funds portfolio—equities, bonds, cash—is crucial. Ensure it matches your investment strategy. Diversification within the fund can help reduce risk.
  7. Exit load and tax implications: Be aware of any exit load charges if you withdraw your investment before a certain period. Also, consider the tax implications of your investments, as these can affect your returns. Long-term equity investments have different tax rules compared to debt fund investments in India.
  8. Investor reviews and ratings: Look at reviews and ratings from other investors and research agencies. This can provide an additional layer of insight into the fund’s performance and management quality. You can also compare mutual funds and their reviews and ratings on the Bajaj Finserv platform.

Considering these factors can help you make a more informed and suitable investment decision, ensuring that the mutual fund you choose fits your financial needs and investment profile. When investing in mutual funds, choosing between SIP (Systematic Investment Plan) and lumpsum investments depends on your financial stability and market timing.


In conclusion, while investing in mutual funds can be a lucrative opportunity, it's essential to approach it with a well-rounded perspective along with the mutual fund performance. By considering factors such as your financial goals, risk tolerance, fund performance, expense ratios, and fund management, you can make more informed decisions that align with your investment strategy. Additionally, be mindful of the exit loads and tax implications associated with your investments.

For those looking to explore a wide range of options, the Bajaj Finserv Mutual Fund Platform offers access to over 1000+ Mutual Fund Schemes where you can also compare mutual funds. This platform provides a comprehensive suite of tools and resources, making it easier to compare different funds and manage your investments effectively. Whether you are a seasoned investor or just starting out, the Bajaj Finserv Platform can be a valuable resource in your investment journey, helping you to navigate through the plethora of mutual fund choices with ease.

Essential tools for mutual fund investors

Mutual Fund Calculator SIP Calculator Lumpsum Calculator Step Up SIP Calculator
SBI SIP Calculator HDFC SIP Calculator Nippon India SIP Calculator ABSL SIP Calculator
Tata SIP Calculator BOI SIP Calculator Motilal Oswal Mutual Fund SIP Calculator Kotak Bank SIP Calculator

Frequently asked questions

What is wrong with choosing a mutual fund to invest in based on past performance only?
Choosing a mutual fund solely based on past performance is misleading because it doesn't guarantee future returns, and top performers often fail to maintain their lead in subsequent years.
Does past performance of mutual fund guarantee future returns?
No, past performance of a mutual fund does not guarantee future returns. Market conditions, economic factors, and fund management changes can all affect future outcomes.
How do I know if my mutual fund portfolio is good or bad?
Evaluate your mutual fund portfolio's performance by comparing it to benchmarks, checking diversification, assessing risk-adjusted returns, and ensuring it aligns with your investment goals and risk tolerance.
How much return can I expect from mutual funds in 5 years?
Returns on mutual funds over five years can vary widely depending on the type of fund, market conditions, and the investment strategy. Historical data shows significant variations, underscoring the unpredictability of specific return rates.
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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.