Many investors would be investing in mutual funds and putting their money arbitrarily out of sudden impulse. They do not realize their goals, time horizon or risk tolerance. After a while, they may have observed that their returns fell short of the returns they kept reading and hearing about in the media, even they held the fund for the entire time. If so, you’re not alone. A fund’s reported return is only part of the picture. Many investors tend to get fascinated with the top most of mutual funds on reflecting their overrated returns at third-party websites such as money control, the fundoos, VRO etc.  Third-party websites pick up some data from the past, make bias assumptions, which are the most likely silent and then highlight whatever the data concludes.  A lay man investor could not understand the underlying risk-return statics of any top most fund scheme.  He firmly believes and invests his money into these top most funds without further analysis and may come up with exactly opposite conclusion. Each rating agency has used different criterion. Every fund portal has chosen grade funds at different duration of period. They tend to use half backed strategy, well, it’s not always pretty, and you rarely, if ever, hear it mentioned. Typically, the studies find that the returns investors have earned over time are much lower than returns of the investment return.

Past-performance or underperformance Return

Let’s ride on a journey back in time. You bought the Top Star Rating mutual fund worth Rs 10,000 in 2011 with indicated annual return 10.7%, held on to it for 5 year and did not do a thing – neither adding money nor taking it out—your account would’ve been worth Rs 16,624 in 2016. However, you actually real life returns have earned just 3.7% during the same 5-year period. That’s not typo; the average investor only earned 3.7%. Now take a minute and think about this— that’s a gap of 7% per year! This gap means that if the average investor started with Rs 10,000 investment in 2011, it would only be worth Rs 11,992 after 5 years. That’s money—over Rs 4,600—just left laying on the table. How’d this happen? We get started to all understand the titular critical question: Why INVESTMENT returns and INVESTOR returns are always different?  It has, hence explicitly proved that “Past performance may or may not sustain in future.”  Shall we mean that we should not invest on the basis of past-performance of funds? It is certainly YES, we should not rely on past-performance alone, many of us tend to invest in a few products and forget about them. We don’t get periodically review our investments. We do not have even a proper asset allocation at different stages of life. Every investment portfolio needs to rebalance based on the performance of investment products and life situations. Therefore, it makes far more sense to ignore what the fund star rating agencies are doing at all to the goal-based investor. It should be based on your investment decisions on what you need to do reach your goals. But investors, is that hard to do. Though it is not programmed, we are wired to avoid pain and pursue pleasure and security. We feel right to sell when everyone around us is scared and buy when everyone feels great. It seems right, but it is not rational.

Set your own Benchmark

Mostly investors used to compare the returns of a fund with another fund. They do not recognize that such comparisons are often misinformed and do not reveal any useful insight because you may be comparing apples and oranges. Every scheme has set own objective and benchmark to measure its return. Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) have defined market benchmarks representing different market cap segments and sectors. They also have sectoral indices representing different industry sectors. These benchmarks are more useful for fund managers who have been managing the respective mutual fund schemes. Every fund manager has task to beat the relevant benchmark to showcase their expertise and promote their schemes through the sales and marketing team of the AMCs. However, a savvy investor should not analyze the portfolio of a mutual fund scheme to identify the relevant benchmark for the fund. Because, fund managers and any mutual fund scheme do not know your financial goals, time horizon and risk profile.  You should have to set your own benchmark when evaluating the relative returns of your mutual fund scheme. Your set benchmark has nothing to do with fund manager’s benchmark which is defined through regulation. For an investor, the benchmark is different for each investor based on their respective risk profiles and goals. For instance if you need 12 percent returns to achieve the goal in say 10 years then it becomes the your benchmark and how smartly you over achieve this number without taking extra risk.

Optimize your Asset Allocation

You may be hearing that “Do not put all your eggs in one basket”. Asset allocation through mutual funds is an investment strategy that aims to strike a balance between equity, debt and gold for the investments made. Some schemes have very concentrated portfolios, whereas others may have diversified portfolios. Outperformance or underperformance of one fund versus another may be explained by the company concentrations in the two portfolios and how market conditions affected them during the period in question. Asset allocation is optimized by diversifying investments on the basis of investor’s financial goals, risk taking appetite and the investment time frame. Suppose you are investing in equities alone then your investments are remain volatile, though they have potentially earn higher returns but also put your investment at higher risk. If you are investing only in debts you will get moderate return with exposure to moderate risk. In case you make losses that can indefinitely defer your short term goals and will also affect your long term goals. It is also necessary that you should have some cash at hand and which can be easily invested in liquid funds. There is no hard and fast rule neither a sure shot formula to find the perfect asset allocation. Asset allocations are created on individuals needs.


You would be finding Top Performing Funds in many investment blogs on the web. Every year you will find new names making it to the Top Performing Funds list and some existing names dropping out. Even if you invested in top performing funds after a lot of research, you cannot expect these funds to be in the top 5 or top 10 forever. But if your mutual fund schemes are able to outperform your own set benchmark as outlined above on a consistent basis, across different market conditions, chances of you meeting or exceeding your investment goals are quite high.


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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at
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