Should you invest in best performing mutual fund?

The most common way to select a mutual fund is to invest in the scheme at the top in terms of recent returns. The problem, however, is the best performing scheme of 2021 or 2020 or any other year, may not remain best-performing in 2022 or any future years. So, where to invest? Invest in a consistent fund, which has delivered above average returns in periods of bull run and has fallen lesser in a bear market.

“No fund outperforms across all investment horizons. Every fund performs in cycles. Hence, investors should be more cautious while investing in a best performing fund,” says Pankaj Pandey, head of research at ICICI direct Research.

The tables show how the best performing schemes have changed over the years across categories.

The year 2021 saw value investment style outperforming growth style of investment. Sectors which were laggards in the last few years saw outperformance. For instance, as per data from ICICI Securities, Nifty50 Equal Weight Index outperformed in 2020 and 2021, as compared to Nifty 50 index, which outperformed in previous years indicating broad-based performance within large caps.

Similar to markets, fund managers or AMCs also perform in cycles. “No AMC can outperform or underperform consistently,” says Pankaj Pandey.

Like, fund from Axis AMC, after outperforming in the last few years, underperformed in the year 2021 as growth investment style underperformed due to broad-based market performance. Funds from other AMCs like HDFC, Nippon and Franklin outperformed in the year 2021 as sector rotation and value buying in beaten down sectors helped their investment style.

And some other AMCs like Mirae Asset maintained its consistent outperformance track record on the back of balanced investment style and changing portfolio as per evolving market preference. Canara Robeco AMC scored high on outperformance consistency. UTI AMC funds have shown considerable improvement in terms of outperformance in the last few years.

As per the report, emerging AMCs or funds like Parag Parikh, PGIM, Union and IIFL performed better and looked promising.

Consistent mutual funds

In largecap space, according to ICICI Securities, schemes from Axis, Canara, ICICI Prudential, Kotak and Mirae are relatively more consistent in outperforming category average returns.

In the midcap space, Axis, Kotak and Nippon mutual funds have shown consistent performance, and in the small cap category, Nippon Small Cap, Kotak Small Cap and SBI Small Cap have been the consistent performers.

Axis, Canara, DSP and UTI flexicap schemes have been consistent performers in the respective category.

Similarly, in the large and midcap category, Mirae, Kotak and SBI funds are consistent outperformers. ICICI Pru, Nippon and UTI funds are category outperformers in value space.

In ELSS, Mirae, Invesco, Canara, and UTI Funds are doing better, says the ICICI Securities report.