A 20-year study by HDFC Securities has demystified the major inclination or behaviour of investors in picking up mutual funds based on their previous 1-year or 3-year returns. HDFC Securities in its analysis spanning mutual fund data from 2005 to 2025, finds that a fund’s recent stellar performance especially to its 1-year return is often a misleading boost that inflates its overall record and doesn’t reliably predict future success.

The 1-Year Return Trap

HDFC Securities warns investors to avoid investing on a particular mutual fund on the basis of “purple patch", a period of excellent, recent outperformance.

In other words, a strong rally in the last year can inflate the 3-year or 5-year averages, even if earlier performance was average.

It has shown the idea with an illustration:

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