Why Chasing “Top 5 Mutual Funds” Could Derail Your Long-Term Wealth

Let’s be honest — we’ve all done it.

You’ve made up your mind to start investing seriously.

You’ve heard friends and colleagues talk about mutual funds, how they help build wealth and beat inflation over the long term.

So, you do what most smart, tech-savvy investors do: you open Google and type “Top 5 mutual funds in India”.

In seconds, you’re flooded with neatly curated lists — each promising the “best-performing funds” of the year.

You scan a few returns charts, spot one that’s consistently showing 18–20% annual growth, and think, “This is it. This is the one.”

It feels logical.

After all, if a fund has been performing well for the last few years, it must be managed well, right? Surely, the numbers don’t lie.

You invest confidently, expecting that the fund’s winning streak will continue.

But here’s the uncomfortable truth: what looks like a sure-shot winner today may turn into a disappointment tomorrow.

If thousands of investors are rushing into the same “top 5” funds, can they all truly outperform?

The financial markets don’t work that way. What’s often overlooked is that top rankings are temporary, not timeless.

This “shortcut” approach — relying on search rankings and short-term performance — can seem convenient, even smart.

But in reality, it’s like driving forward while looking in the rear-view mirror.

You may move for a while, but sooner or later, you’re bound to crash.

Table of Contents

1. Why Past Performance Is a Deceptive Metric
2. The Reality Behind “Return-Chasing Epidemic”
3. What the Data Reveals: The Rise and Fall of Top Mutual Funds
4. Why Performance Doesn’t Persist
5. The Psychology of Return-Chasing
6. The Smarter Way to Choose Mutual Funds
7. Building Long-Term Wealth: The Holistic Approach

1. Why Past Performance Is a Deceptive Metric

One of the most common investing myths is the belief that past performance predicts future results.

It doesn’t.

Mutual fund returns are reflections of market cycles, economic trends, and sectoral momentum — all of which are constantly shifting.

What works in one market phase can completely collapse in another.

For example, a fund that performed brilliantly during a bull market dominated by technology or banking stocks might stumble when the economy cools or when the focus shifts to value-oriented sectors like infrastructure or manufacturing.

Yet, many investors continue to pick funds purely based on their historical returns, believing that “if it worked before, it will work again.”

Unfortunately, this is one of the biggest financial blind spots.

When you buy into a fund at its peak — which is often what happens when you chase top performers — you’re effectively paying a premium for past glory.

The fund’s portfolio may already be overvalued, and the next phase could bring slower growth or even a decline.

So while it’s tempting to rely on numbers and charts, the reality is that returns tell only half the story — and usually, the less useful half.

2. The Reality Behind the “Return-Chasing Epidemic”

Every single month, more than 15,000 people in India search for “top 5 mutual funds”.

That’s not just a statistic — it’s a symptom of a larger behavioural pattern economists call the return-chasing epidemic.

Return-chasing is when investors pour money into funds that have recently delivered stellar returns — expecting the trend to continue.

It’s a bit like joining a marathon halfway through and expecting to catch the leaders, without realizing they’re already running out of breath.

The psychology behind this is simple: recency bias.

Our brains naturally give more weight to recent events than older ones.

So when a fund has performed well in the last one or two years, we assume it’s “safe” and “trustworthy.”

But markets don’t reward emotional decisions.

In fact, data shows that investors who constantly hop between “top-performing” funds often end up earning far lower returns than the very funds they invest in — simply because they enter late and exit early.

The truth is, the best investors don’t chase returns; they chase discipline.

When the tide turns — and it always does — the once-hyped funds lose their shine, and those who jumped in for quick gains are left disillusioned.

Meanwhile, the patient investors who stuck to a diversified, goal-based strategy quietly continue to compound their wealth in the background.

3. What the Data Reveals: The Rise and Fall of Top Mutual Funds

To understand just how fleeting “top performer” status really is, let’s look at a comprehensive 10-year study (2015–2025) conducted on direct equity mutual funds — funds that invest primarily in listed stocks and are purchased directly from asset management companies.

The researchers tracked the top 10 performing funds during each three-year window and then compared their rankings in the following three-year period.

The results? Nothing short of eye-opening.

Short-term winners rarely stay on top

Across five consecutive three-year windows, not a single mutual fund managed to remain in the top 10 from one period to the next.

The champions of one phase almost always vanished by the next.

For instance, the fund ranked #1 between 2015–2018 fell to #58 in the very next cycle (2018–2021).

Another fund that dominated from 2017–2020 plunged to #256 between 2020–2023.

That’s not a dip — that’s a freefall.

Major declines are the norm, not the exception

Out of the initial top 10 funds, a large majority dropped not just out of the top 10, but often out of the top 100 altogether.

In fact, only 20–40% of those top performers even managed to stay within the top 100 during the next evaluation period.

It’s a sobering reminder that markets reward consistency, not flashiness.

Consistency is exceedingly rare

This pattern of volatility persisted across all the overlapping three-year windows.

Among the funds that were top-ranked in 2019–2022, their 2022–2025 rankings were as low as 40, 76, 127, 241, 265, 270, 281, 305, 310, and 311.

Not a single one stayed in the top 10. Only two remained in the top 100.

So much for “proven performers.”

This data exposes the fundamental flaw of the “top 5” approach: what you see in performance tables is history — not destiny.

4. Why Performance Doesn’t Persist

If a mutual fund has done exceptionally well recently, it’s natural to assume that it’s run by a genius fund manager or backed by a bulletproof strategy.

But that assumption often falls apart when you understand why performance spikes in the first place.

A mutual fund isn’t some mystical entity that creates wealth out of thin air — it’s essentially a basket of stocks from various companies and sectors.

When a specific sector — say technology, banking, or pharma — experiences a boom, funds with heavy exposure to that sector start looking like “winners.”

But the market is never static. What’s hot today can cool off tomorrow.

When a different sector begins to outperform, yesterday’s star funds lose their edge.

This shift — called sector rotation — is a natural and recurring phenomenon in markets.

Let’s look at a real-world illustration: The Nifty Media Index.

Between 2014 and 2018, it was on fire — soaring nearly 95% and almost doubling investor wealth in just four years.

Financial headlines were full of optimism; every mutual fund with media exposure was celebrated as a top performer.

And then the tide turned.

By mid-2025, the same index had fallen roughly 47%, returning close to its 2014 levels.

That’s over a decade gone by — only to end up almost where it started.

It’s a striking example of how short-term performance can be deceptive.

When we zoom out, these patterns become clearer.

No fund — not even the most well-managed — can consistently stay ahead of every market cycle.

Different sectors lead at different times:

• 2014–2016: Banking and IT dominated.
• 2017–2019: Consumption and pharma surged.
• 2020–2022: Technology and digital-focused funds soared post-pandemic.
• 2023 onwards: Energy and infrastructure began taking the lead.

Each cycle crowns new “top performers,” only for them to fade as market dynamics evolve.

So, when you pick a fund because it’s currently outperforming, you’re essentially buying yesterday’s trend — not tomorrow’s growth.

It’s not that these funds are bad; it’s that their performance is contextual, not permanent.

And understanding that distinction is the first step to becoming a wiser investor.

5. The Psychology of Return-Chasing

If we know that chasing returns doesn’t work, why do so many people still do it?

The answer lies not in economics — but in psychology.

Human brains are wired for patterns. When we see something going up, our instinct tells us it’s “safe.”

It’s the same emotion that fuels FOMO (fear of missing out) in social life — except in investing, it’s amplified by money.

Imagine this: your friend tells you their mutual fund gave 25% returns last year.

You immediately feel like you missed out.

You check the same fund, see its upward graph, and convince yourself it’s still a good time to jump in.

You’re not investing — you’re reacting.

This tendency is called recency bias — giving too much weight to recent experiences and assuming they’ll continue indefinitely.

Add to that the herd effect — our subconscious desire to do what others are doing.

When everyone around you seems to be investing in the same “top-performing fund,” staying on the side-lines feels uncomfortable, even wrong.

But here’s the paradox: by the time a fund becomes “famous,” most of its gains have already happened.

The average investor ends up buying high, panicking during corrections, and selling low — the exact opposite of what builds wealth.

In contrast, the most successful investors develop behavioural discipline.

They know that investing is not about adrenaline but patience.

They resist emotional triggers and focus on consistency, not excitement.

Think of investing like gardening.

You can’t dig up the soil every week to see if the plant is growing.

You nurture it, protect it, and give it time.

The same goes for wealth — it rewards patience, not impulse.

6. The Smarter Way to Choose Mutual Funds

If short-term returns are unreliable, then how do you actually pick the right mutual fund?

The answer lies in shifting your focus from “what’s working now” to “what works over time.”

Here’s a smarter, more holistic way to choose mutual funds — one that aligns with your goals rather than Google trends.

1. Focus on consistency, not spikes.

Instead of chasing the fund that topped charts this year, look at how it has performed across multiple market cycles — both bull and bear markets.

A fund that delivers steady, moderate returns over 5–10 years is far more reliable than one that briefly shines and fades.

Check rolling returns (average returns over consecutive time periods) instead of point-to-point returns.

Rolling data smooths out short-term noise and gives a truer picture of consistency.

2. Evaluate the fund manager’s track record.

A mutual fund is only as good as the person managing it.

Does the fund manager have a history of navigating market volatility well?

Have they delivered across different funds or just one lucky phase?

Consistent decision-making often matters more than flashy numbers.

3. Understand the investment style.

Each fund has its own strategy — some are growth-oriented, focusing on high-potential companies; others are value-based, picking temporarily undervalued stocks.

There are also sector-heavy funds, which can deliver short bursts of high performance but come with higher risk.

Make sure the fund’s philosophy aligns with your comfort level and time horizon.

4. Diversify smartly.

Putting all your money in one “hot” fund or one category is a recipe for disappointment.

Instead, spread your investments across equity, debt, hybrid, and international funds depending on your risk appetite and goals.

Diversification doesn’t eliminate risk — but it smooths it out.

5. Rebalance periodically.

Your Portfolio is not a “set it and forget it” product.

As markets move and your goals evolve, the balance between equity and debt shifts.

Reviewing and rebalancing once or twice a year keeps your portfolio aligned with your risk profile.

It’s like tuning an instrument — a small adjustment at the right time can preserve harmony.

In essence

Don’t invest in the “top 5 funds” — invest in the right funds for you.

The best fund is not the one that’s topping charts, but the one that helps you stay invested comfortably and consistently through all market conditions.

7. Building Long-Term Wealth: The Holistic Investment Mind-set

Wealth isn’t built by picking the “top 5 funds” — it’s built by having the right mind-set.

A holistic investor looks beyond short-term returns and focuses on long-term goals.

Before choosing any fund, ask yourself: What am I investing for? Retirement? A child’s education? Financial independence?

Your goals — not a trending list — should drive your investment choices.

True investing success comes from clarity, patience, and discipline.

Market cycles will change, and today’s best-performing fund may lag tomorrow.

But if your portfolio is diversified, aligned with your time horizon, and regularly reviewed, you’ll stay on track regardless of market noise.

Remember, wealth creation is less about timing the market and more about time in the market.

And if you’re unsure where to begin, a Certified Financial Planner (CFP) can help you build a goal-based, personalized plan that keeps you focused on long-term success.