Can We Select Mutual Funds Considering Only Past Performance?

Published: June 20, 2017 at 9:54 am

Last Updated on October 8, 2023 at 1:44 pm

Have you not read the mutual fund past performance disclaimer? Then how can we select mutual funds using past performance alone? In this post, I discuss this question asked by Swati Joshi.  It is no secret many in the financial services dislike me. So their favorite approach to criticism is to claim that my “fund selection strategy” is based on past performance and is flawed.

Again let me not beat around the bush. Yes, past performance is not an indicator of future performance. Neither is “careful selection” of a mutual by an “advisor”.

Readers who have journeyed with me for a good part of the last 5 years will realize that my stress on the importance of fund selection (never high to begin with) has dramatically dropped to the extent that I wrote: How to use Inky Pinky Ponky for selecting Mutual Funds!

The reception to that post was expectedly lukewarm. Because most people still make too big a deal out of mutual fund selection. This is the problem with starting a SIP. To a newcomer, it resembles an insurance policy with monthly premium payment.


Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

They think once the fund is selected and the SIP is set up, their goals will be automatically reached because “in the long term, equity builds wealth” – ha!

So they are so worried about selecting the right fund. Many advisors, including journalists who run advisory portals, exploit this fear and make a big deal about fund selection. See: Selecting the right equity mutual fund scheme is not possible!

The step in answering the title question is to recognize that unless we have a solid review strategy in place, which funds you select does not matter.

Now, suppose we ignore the past performance – this means returns and all risk metric like alpha beta, gamma, ….., upside-downside etc.

Some people seems to believe past performance only refers to returns. When once the NAV is declared on a business day, it is history. All data derived from NAV history is past performance.

Photo Credit: Brian Snelson

So now that we have ignored NAV history and all its derivatives, please show me an alternative that will help me predict the fund’s future performance.

Some people claim to look at the fund portfolio and investigating the fund managers picks, strategy, and potential future performance taking market outlook into account is a superior strategy. In fact, MorningStar calls this forward-looking analysis (Their qualitative rankings as opposed to the quantitative past performance based star ratings).

What amuses me about this, is the fact that the information used for such forward-looking analysis is historical information. So if there is no math involved, then it is merely a subjective opinion based on past data.

I am not interested in the debate of which is better? Who cares! However way you select a mutual fund, you will have to review its performance in real time again based on updated past data.

Personally, I have zero interest in tracking factsheets and worrying how much cash the fund currently holds. If I can make some sense out of such time spent, then I would be invested in direct equity. I used mutual funds because I have better things to do with my time and all I want is a black box with two labels – the current nav and the category the fund belongs to.

Those two labels are good enough to choose a fund, review its performance and choose another if necessary.

Swati’s full question is: Can we select funds considering only past. Performance? No other criteria like a change in strategy, fund manager needs to be taken into consideration?

A change in strategy and or fund manager is also past information. If there is a significant change in the fund’s strategy, we will be given a chance to exit without load (but not tax).

I have no idea who my fund’s managers are. They some corporate employee waiting to jump ship when they can smell a better pay packet. Getting emotionally attached to them is a waste of my time and emotion.

Like I said, the black box with two labels should suffice. If there is a change in performance because the fund manager has changed or because he went loony, it will show in the NAV and I will take necessary course corrections. No biggie.

So Can We Select Mutual Funds Considering Only Past Performance?

I can spot nothing wrong with it. And I certainly cannot spot anything objectively superior to it.

If there were reliable ways in which future performance can be predicted, the “market” will no longer be one.

I feel like I have said it a zillion time already, a proper review process should be in place. This is possible only if there is a proper investment strategy in place.

1 Well defined goal (Financial Goal Planning: How to buy an Audi Car)

———>

2 Suitable asset allocation (Deciding on asset allocation for a financial goal)

———>

3 Choice of fund category Minimalist Portfolio Ideas for Young Earners

———>

4 Selection of funds in each category (so many posts on this, here is the latest: Two Simple Ways To Screen For Mutual Funds)

———>

5 Systematic investments with monitor and review (How to Review Your Mutual Fund SIPs

———>

6 Portfolio management and systematic risk reduction (Simple Steps to De-risk Your Investment Portfolio and How to systematically reduce the risk associated with a SIP)

Once all this is in place, worrying about which fund to select would appear childish.

___________________

GameChanger- Forget Startups, Join Corporate & Live The Rich Life You want

My second book, Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantco-authored with Pranav Surya is now available at Amazon as paperback (₹ 199) and Kindle (free in unlimited or ₹ 99 – you could read with their free app on PC/tablet/mobile, no kindle necessary).

It is a book that tells you how to travel anywhere on a budget and specific investment advice for young earners.

 

You can Be Rich Too with Goal-Based Investing 

is my first book with PV Subramanyam. It helps you ask the risk questions about money, seek simple solutions and find your own personalised answers with nine online calculator modules.

The book is available at:

Amazon Hardcover Rs. 271. 32% OFF

Infibeam Now just Rs. 270  32% OFF. If you use a mobikwik wallet, and purchase via infibeam, you can get up to 100% cashback!!

Flipkart Rs. 279. 30% off

Kindle at Amazon.in (Rs. 90.74 74% OFF) Read with free app

Google PlayRs. 90.74 Read on your PC/Tablet/Mobile

Now in Hindi!

Pre-order the Hindi version via this link

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.

  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter with the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision-making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)