“The stock market is the only market where people buy more when prices go up.” — Warren Buffett
Every January, Divya did the same thing. She would open Moneycontrol, sort mutual funds by 1-year returns, pick the top three, stop her existing SIPs, and start new ones in last year’s winners. She called it “staying updated.” Her friends called it “smart switching.” Her portfolio had a more honest name for it: consistent underperformance.
In 2021, she chased a small-cap fund that had returned 78%. In 2022, that fund fell 31%. She had already switched out — into a thematic infrastructure fund that had returned 54% in 2021. In 2022, infrastructure fell 18%. Each year, she bought last year’s peak and endured the following year’s correction.
Over five years of “smart switching,” Divya’s actual portfolio returned 6.8% CAGR. A simple, well-selected diversified equity SIP, left untouched, would have returned 14.2% over the same period.
The Return-Chasing Trap
Return-chasing is one of the most studied and documented behaviours in personal finance. It is also one of the most persistent, because it feels rational. If a fund returned 80% last year, shouldn’t it be a better choice than one that returned 12%?
The answer, consistently, is no. High returns in one year typically reflect exceptional market conditions in the fund’s strategy area. When those conditions normalise, last year’s hero becomes this year’s laggard. This is called mean reversion, and it is one of the most reliable phenomena in financial markets.
The Category Rotation Reality
Different market-cap categories and sectors take turns leading. By the time a category appears at the top of the returns chart, the rotation is often already underway — meaning new investors are buying the category just as it begins to slow down. This is precisely why past performance disclaimers exist on every mutual fund advertisement. They are not legal boilerplate. They are a genuine description of how returns work.
What to Look For Instead
Look for funds with consistent category outperformance across 5-7 year periods, managed by stable teams with clear investment philosophies. Boring, consistent performers are almost always better long-term bets than last year’s stars. This kind of evaluation requires data, context, and time — which is exactly what a financial planner brings to fund selection.
Divya has stopped switching. She now holds a structured portfolio built with her financial planner — reviewed annually, not monthly. Her portfolio has been recovering steadily since she stopped optimising it.
The Lesson
The fund you should be worried about is not the one with the lowest last-year returns. It’s the one you keep abandoning just before it recovers. A financial planner’s job, in part, is to protect you from yourself.
The Planner Advantage
Return-chasing is one of the most predictable investor behaviours — and one of the easiest for a financial planner to prevent. When Divya wanted to switch her SIP to last year’s top fund, her planner would have done one thing: pulled up a 5-year rolling returns chart and shown her what happened to last year’s winners in subsequent years. That single visual — which takes 30 seconds for a planner to produce and interpret — prevents the kind of damage that Divya spent five years accumulating. Planners also prevent the transaction costs, exit loads, and capital gains implications of constant switching that most investors never calculate before they act.