Mutual fund bets prove the Random Walk Theory

Do you know why stock picking is an art and not a science?

Fortune India did a deep-dive of mutual fund (MF) holdings over the past six years, from the Covid-disrupted FY21 through FY26. The study revealed a cohort of 46 stocks where MFs have collectively ramped up their holding (1%-plus) over the quarters—Q2FY21 to Q2FY26.

Yet the data tells a sobering story. There is virtually no correlation between the magnitude of shareholding increases and subsequent returns, a correlation of just 0.07, statistically indistinguishable from random chance.

Even more surprising?

The relationship between earnings growth and shareholding increases was equally weak with a correlation of 0.06, suggesting that mutual funds either couldn’t identify future earnings winners or were systematically overpaying for growth.

This analysis uncovers the fascinating disconnects between institutional conviction, fundamental performance, and market returns.

The range of outcomes is staggering. From -5.86% to +63.94% CAGR in share prices, and from -13.10% to +230.86% in earnings growth. Three of the top 10 conviction plays delivered negative returns or modest single-digit gains, while others turned into multi-baggers.

While the highest MF conviction plays disappointed, the stocks that actually delivered exceptional returns tell a different story.

GE Vernova T&D India emerged as the undisputed champion with a spectacular 95.10% CAGR in share price. What’s remarkable is that this performance was backed by genuine earnings growth of 102.93% CAGR, one of the rare instances where price and fundamentals moved in lockstep. Gokaldas Exports is the most fascinating case study: 63.94% CAGR in price despite negative 11.11% earnings CAGR. This was pure valuation expansion as the PE ratio jumped from 20.3x to 41.2x.

The harsh lesson: institutional buying activity had zero predictive value for subsequent returns.