Chasing Hot Funds vs Staying Consistent: What Data Shows

Every year around this time, we notice a pattern in our WhatsApp community. NRIs share screenshots of "top performing funds of 2025" and ask: Should I move my money here?

The fund that topped charts last year suddenly gets flooded with fresh investments. The logic feels bulletproof. The manager proved themselves. The strategy works. Why not ride the winning horse?

But here's what 30 years of investor behavior data shows: the average investor who chases performance earns 8.48% less than the market itself. In 2024, while the S\&P 500 returned 25.02%, the average equity fund investor earned just 16.54%.

This gap isn't about picking bad funds. It's about switching to good funds at the wrong time.

At Belong, we've helped NRIs navigate this tension between chasing returns and building consistent portfolios. This article breaks down what the data actually shows, and why boring consistency often beats exciting performance.

What Does "Chasing Past Returns" Actually Mean?

When we talk about chasing past returns, we mean making investment decisions primarily based on recent performance. It looks like this:

You see: A small-cap fund returned 45% last year.

You think: This fund manager is brilliant. I should move my money here.

You do: Switch from your existing fund to this "hot" fund.

What happens: The fund underperforms for the next 2-3 years. You switch again to another hot fund. The cycle repeats.

This behavior is extremely common. According to Morningstar's 2025 Mind the Gap study, sector equity funds, the ones most often chased for hot returns, showed the widest gap between fund returns and investor returns at 1.5% annually.

Investors lost money not because the funds were bad, but because they bought after the rally and sold during the correction.

👉 Tip: Before investing in any "top performing" fund, ask yourself: Would I have bought this fund two years ago, before the performance happened?

Why Winners Rarely Stay Winners

This is where the data gets uncomfortable.

The S\&P Persistence Scorecard tracks whether top-performing funds maintain their position over time. The findings are stark:

Among top-quartile funds in December 2020, not a single fund remained in the top quartile over the next four years.

Zero funds. Out of 169 funds across seven categories, just 2 managed to stay in the top quartile for four consecutive years.

This isn't a US phenomenon. Research on Indian mutual funds shows similar patterns. A study covering 2004-2013 found that while some short-term persistence exists, it's often driven by poor performers staying poor rather than winners continuing to win.

Time Period	Funds Staying in Top Quartile
1 Year	~25% (roughly random)
2 Years	Less than 10%
4 Years	Near zero

The academic term is "mean reversion." In plain language: exceptional performance tends to return to average over time.

What SPIVA India Tells Us

The SPIVA India Scorecard measures how actively managed Indian funds perform against their benchmarks. The 2024 and mid-2025 data reveals:

Indian Equity Large-Cap Funds:

60% underperformed their benchmark in 2024
66% underperformed in H1 2025

Indian Equity Mid/Small-Cap Funds:

Majority underperformed in 2024
Performance deteriorated over longer periods

Over 10 years:

84% of large-cap funds underperformed
Fund selection risk was acute, with bottom-quartile funds trailing top-quartile by 9%

What does this mean for NRIs chasing last year's top fund?

Even if you successfully identify a top performer, the odds of that fund continuing to outperform are statistically against you. And the more you switch between funds trying to catch winners, the worse your actual returns become.

👉 Tip: Use Belong's Mutual Funds Explorer to compare funds by consistency metrics, not just recent returns.

The Real Cost of Performance Chasing

Let's quantify what chasing returns actually costs.

The DALBAR 2025 Report found:

2024 investor gap: 8.48 percentage points
This was the fourth-largest gap since tracking began in 1985
Investors guessed market direction correctly just 25% of the time

The Morningstar Mind the Gap 2025 Report found:

Investors lost about 15% of the return their funds generated
Over 10 years ending December 2024, the average investor earned 7.0% annually
The funds themselves returned 8.2% annually
That 1.2% annual gap compounds to massive losses over time

What does 1.2% annually mean in real money?

A $100,000 investment at 10% annual return for 20 years grows to $717,503.

The same investment with a 1.2% behavior gap (8.8% effective return) grows to just $535,857.

You lose $181,646 just from switching and timing decisions.

For NRIs investing in crores for retirement or children's education, this gap represents lakhs of rupees evaporating to behavior, not market performance.

Why Consistency Beats Performance

If chasing returns fails, what works? The data points to boring consistency.

Target-date and allocation funds showed the narrowest investor return gap in Morningstar's study at just 0.4% annually. These funds don't chase hot sectors. They maintain consistent asset allocation and rebalance automatically.

Index funds saw investor returns closer to fund returns because there's less temptation to time entries and exits.

Low tracking error funds (funds that closely follow their benchmarks) had gaps under 1%, compared to nearly double for high tracking error funds.

The pattern is clear: the less investors trade, the more they earn.

Consistency works because:

Compounding needs time. Every switch resets your compounding clock.
Transaction costs add up. Switching triggers exit loads, TDS for NRIs, and potential capital gains tax.
You can't time mean reversion. The hot fund will cool down. You just don't know when.
Emotional decisions compound badly. Each switch is usually made at the wrong time.

👉 Tip: A fund that consistently delivers 12% is more valuable than one that swings between 40% and negative 10%.

What the 15-Year Convergence Study Shows

Here's a finding that should change how NRIs think about fund selection.

A comprehensive 15-year study of 17 Indian mutual fund schemes across large-cap, mid-cap, small-cap, and flexi-cap categories found something remarkable:

Despite wide short-term fluctuations, 15-year annualized returns converged around 15%.

The distribution:

68% of funds delivered 14-16.6% annualized returns
95% fell between 12.8-17.6%
99.7% remained within 11.5-18.9%

In other words, even if you didn't pick the "best" fund, your patience would have earned you nearly equivalent returns.

The researcher noted that staying invested benefits from several factors: fund managers optimize portfolios over time, you avoid switching costs and taxes, sectors and styles mean-revert, and compounding does its work.

For NRIs, this is liberating. You don't need to find the needle in the haystack. You need to buy a reasonable haystack and hold it.

The Hot Hand Fallacy in Mutual Funds

Sports fans recognize the "hot hand fallacy." A basketball player makes five shots in a row, so fans (and the player) believe the next shot is more likely to go in. Statistically, it isn't.

The same fallacy affects fund selection.

A recent Morningstar analysis examined funds that received massive inflows (over $1 billion in a single year) after spectacular performance. The researcher compared three-year returns before the inflow surge with three-year returns after.

The results:

Funds that attracted huge inflows based on past performance consistently underperformed in subsequent periods. The very success that attracted investor money seemed to predict future disappointment.

Why does this happen?

Size becomes a handicap. Funds that were nimble when small become lumbering when large. The same trades that worked with ₹500 crore don't work with ₹10,000 crore.
Regression to the mean. Exceptional performance often includes luck. Luck doesn't persist.
Style cycles. A value fund outperforms when value is in favor. Investors pile in just as the style cycle turns.
Benchmark hugging. Successful funds often become cautious, reducing the very bets that made them successful.

How NRIs Should Actually Evaluate Funds

If past returns are unreliable, what should you look at?

1. Consistency Ratio

Instead of absolute returns, look at how consistently a fund beats its benchmark across different periods. A fund that outperformed in 7 out of 10 years by modest margins is more reliable than one that massively outperformed in 2 years and underperformed in 8.

2. Rolling Returns

Check 3-year rolling returns across multiple starting points. This shows how your experience might differ based on when you invested, rather than cherry-picked periods.

3. Downside Protection

How did the fund perform during market crashes (2008, 2020, 2022)? Funds that limit losses during downturns often compound better over full cycles.

4. Expense Ratio

This is the one factor completely within your control. Lower expenses directly translate to higher returns. Research on Indian mutual funds found direct plans outperform regular plans by approximately 1% per year, with identical risk profiles.

5. Fund Manager Tenure

How long has the current manager been running the fund? A "star" fund with a new manager is essentially an untested fund.

6. Investment Style Consistency

Does the fund stick to its stated mandate? Research on Indian fixed-income funds found substantial style drift from regulator-mandated objectives. A large-cap fund that secretly buys mid-caps may show better returns temporarily but introduces undisclosed risk.

👉 Tip: Compare funds using Belong's NRI FD Comparison Tool for fixed-income options and the Mutual Funds Explorer for equity funds.

The NRI-Specific Problem With Performance Chasing

For NRIs, chasing returns creates additional complications beyond the behavior gap.

Tax implications multiply:

Every switch from Fund A to Fund B triggers a redemption. For NRIs, this means:

TDS at source (20% for STCG, 12.5% for LTCG)
Potential double taxation if DTAA benefits aren't claimed correctly
Need to file Form 15CA/15CB for repatriation

Compliance burden increases:

More transactions mean more paperwork. Each switch requires documentation for FEMA compliance, tax filing, and audit trails.

Currency timing adds another layer:

You're not just timing the fund, you're timing the INR to USD exchange rate. The fund might perform well, but if the rupee weakens during your holding period, your dollar returns suffer.

Solution: GIFT City funds

For NRIs seeking consistency without these complications, GIFT City mutual funds offer structural advantages:

No capital gains tax for NRIs
USD denomination eliminates currency risk
Full repatriation without approvals

Explore options like the DSP Global Equity Fund or Tata India Dynamic Equity Fund for consistent, tax-efficient exposure.

What "Boring" Portfolios Actually Earn

Let's look at what consistent, unremarkable investing actually delivers.

SIP in a flexi-cap fund over 15 years:

Average equity SIP returns in India over 15 years typically fall between 12-14% CAGR depending on category and market conditions.

That means:

₹10,000 monthly SIP for 15 years at 12% = ₹50+ lakhs
₹25,000 monthly SIP for 15 years at 12% = ₹1.25+ crores

No switching. No chasing. No stress.

The behavior gap cost:

The same investor who switched funds annually seeking better returns might earn 9-10% due to the behavior gap. That 2-3% annual difference compounds to:

₹10,000 monthly SIP for 15 years at 10% = ₹41 lakhs
Lost returns: ₹9+ lakhs

The consistency premium:

Investors who stayed with allocation funds (target-date, balanced) captured 97% of their funds' returns versus 82% for those in sector equity funds. That 15% difference over 20 years is potentially decades of retirement income.

👉 Tip: Start a SIP and forget it exists. The best returns come to investors who "forgot" they had investments.

Building a Consistency-First Portfolio

Here's a practical framework for NRIs who want to stop chasing and start compounding.

Core Holdings (70-80% of portfolio)

Choose 2-3 diversified funds and commit:

One large-cap or flexi-cap fund for stability
One hybrid fund for automatic rebalancing
One index fund for low-cost market exposure

These shouldn't be the "best performing" funds. They should be consistently good, low-cost, and run by stable teams.

Satellite Holdings (20-30% of portfolio)

For tactical allocation:

GIFT City funds for tax-free USD exposure
ELSS funds for Section 80C benefits
Sector funds only if you understand the cycle

Review Frequency

Monthly: Check SIP execution (not returns)
Quarterly: Review portfolio allocation
Annually: Consider rebalancing if allocation drifts 10%+
Never: Switch based on 1-year returns

Rebalancing Rules

If equity grows to 80% of a 70:30 portfolio, sell equity and buy debt. This forces you to sell high and buy low, the opposite of performance chasing.

The Psychology Behind Performance Chasing

Understanding why we chase returns can help us stop.

Recency bias: We overweight recent information. A fund's last 12 months feels more relevant than its last 10 years, even though long-term data is more predictive.

FOMO (Fear of Missing Out): When colleagues or WhatsApp groups celebrate gains in a hot fund, we feel left out. The social pain of missing a rally feels worse than the financial pain of a bad investment.

Narrative fallacy: We create stories. "This fund manager is a genius" explains past returns better than "randomness and market conditions aligned." Stories make us confident about the future, even when the data doesn't support confidence.

Action bias: Doing nothing feels irresponsible. Switching funds feels like "managing" your portfolio. But data shows that less action produces better results.

Hindsight bias: Looking back, last year's winner seems obvious. We convince ourselves we would have spotted it. This false confidence leads us to believe we can spot next year's winner too.

👉 Tip: When you feel the urge to switch funds, wait 30 days. If the urge persists, talk to an advisor before acting.

What Professional Investors Actually Do

Here's something interesting. Professional fund managers don't chase performance the way retail investors do.

When a pension fund or endowment hires an investment manager, they typically:

Define the mandate clearly (style, benchmark, risk parameters)
Evaluate process over outcomes
Give managers 3-5 year runways before judging
Fire managers for style drift, not underperformance

Research from the Journal of Finance found that plan sponsors who fired underperforming managers and hired outperformers typically saw no improvement. The fired managers often outperformed after termination, while the hired managers underperformed.

Even sophisticated institutional investors can't reliably pick future winners based on past performance. Individual investors have even less information and face higher transaction costs.

When Does Past Performance Matter?

Past performance isn't completely useless. Here's when it provides useful signals:

Consistently bad performance matters.

A fund that has underperformed its benchmark and peers for 5+ consecutive years likely has structural issues. Poor process tends to persist more than good process.

Extreme underperformance during normal markets matters.

If a large-cap fund lost 30% when the Nifty lost 10%, something is wrong beyond style or timing.

Style consistency matters.

A fund that claims to be conservative but takes aggressive bets shows process problems. Past behavior predicts future behavior.

Expense trends matter.

A fund steadily increasing its expense ratio is extracting more value from investors. This directly predicts lower future returns.

Team stability matters.

High manager turnover suggests organizational problems. Past instability predicts future instability.

The key distinction: use past data to identify red flags and process quality, not to predict returns.

Comparing the Two Approaches

Factor	Chasing Past Returns	Consistency Focus
Average investor gap	1.5-2.6% annually	0.4-0.8% annually
Tax efficiency	Poor (frequent triggers)	Good (long holding)
Time required	High (constant monitoring)	Low (annual review)
Emotional stress	High	Low
15-year outcomes	~10% CAGR after gap	~13% CAGR
Suitable for NRIs	Difficult (tax complexity)	Ideal

The Bottom Line

The data is overwhelming. Chasing past returns costs investors 1-8% annually depending on how actively they chase. Over a 20-year investment horizon, this behavior gap can cut your wealth by 30-50%.

Consistency wins not because it's exciting, but because it avoids the reliable mistakes that excitable investors make.

For NRIs, the math is even more compelling. Every switch triggers taxes, compliance requirements, and currency timing decisions. The simplest path, buying diversified funds, holding through cycles, and reviewing annually, also happens to be the most profitable path.

The fund that returns 12% consistently for 15 years beats the fund that returns 40% once and 5% thereafter. Compounding rewards patience, not brilliance.

Ready to build a consistency-first portfolio? Join our WhatsApp community where NRIs discuss long-term investment strategies daily, or download the Belong app to explore GIFT City funds designed for tax-efficient, consistent returns.

Stop chasing. Start compounding.

Sources:

Chasing Past Returns vs Consistency in Mutual Funds - What Works Better