Choosing Mutual Funds Based on Past Returns? Here Is Why It May Not Work

A 58.85% return in one year is enough to make almost any mutual fund investor take notice. That's what Motilal Oswal Midcap Fund – Direct Growth delivered in calendar 2024. Among the eligible midcap funds examined for this article, it ranked first.

But here's the part a return leaderboard doesn't show. Someone who invested ₹1 lakh on 31 December 2024, after that exceptional year, would have seen its value fall to ₹88,643 by the end of 2025. By 23 October 2026, the same investment would have been worth approximately ₹84,669—a decline of 15.33% from the purchase value.

The fund's 2024 return was real. So was the later decline. The difference is when the investor entered. And this wasn't the experience of every fund that topped the charts in 2024. Some continued to make money; others fell and then recovered.

So, what actually happened to the previous winners—and what does that tell us about choosing a mutual fund based on past returns?

What Happened to the Best-Performing Mutual Funds of 2024?

Rather than choosing a few funds that subsequently performed badly, we started with the top three Direct Growth schemes in each of four equity categories, ranked by their calendar 2024 NAV returns. We then followed those same funds through 2025 and up to the latest completed NAV date, 23 October 2026.

The original AMFI-based screen contained 29 eligible midcap funds, 27 smallcap funds, 37 flexi-cap funds and 30 large-cap funds with usable NAVs at both 2024 endpoints. This is a defined historical sample, not a claim that it includes every scheme in the market.

The first surprise is that six of these 12 funds posted negative returns in 2025. But the second surprise is just as important: the others didn't all fail. All three selected large-cap funds delivered positive returns that year, while two smallcap funds recovered strongly in 2026.

Take Motilal Oswal Small Cap. It lost 4.09% in 2025, but gained 12.97% in 2026 through 23 October. An investor who entered at the end of 2024 would therefore be approximately 8.35% ahead. LIC MF Small Cap also recovered in 2026, but because its 2025 fall was deeper, the same end-2024 investment would still be 3.72% below cost.

That is the real lesson of this table: yesterday's winners didn't follow one path. A top ranking in 2024 was not enough to tell investors which of these outcomes would follow.

What Happened to ₹1 Lakh Invested After the 2024 Mutual Fund Rally?

Let's return to the three midcap funds. All were among the strongest performers in our 2024 screen, yet an investor putting ₹1 lakh into each at the 31 December 2024 NAV would have arrived at very different results.

The calculation doesn't require a forecast:

Investment value = ₹1,00,000 × (ending NAV ÷ purchase NAV).

For Motilal Oswal Midcap, that is ₹1,00,000 × (108.6049 ÷ 128.2707), or about ₹84,669.

Invesco India Midcap, the second-ranked midcap fund in 2024, would have left the same investor roughly 4.70% ahead. HSBC Midcap would have left them around 5.25% ahead. All three belonged to the same category, but they did not own the same portfolio—or face the same risks.

Why Did the Top Midcap Mutual Funds Perform So Differently?

The simplest explanation would be to say that midcap stocks became volatile. That matters, but it does not explain why one midcap fund fell much more than its peers.

For a better clue, go back to what these funds actually owned when 2024 ended.

Motilal Oswal Midcap had 64.7% of its assets in its 10 largest holdings, based on the published December 2024 weights. Nearly a quarter of the portfolio was in IT software, versus less than 7% for each of the other two funds.

That concentration could help explain why their subsequent experiences diverged. S&P's mid-year 2025 India analysis highlighted information technology as the weakest sector in the S&P India BMI during the first half of 2025. A fund with heavier exposure to affected stocks had a different starting risk profile from one with a broader mix.

But it would be wrong to say one sector—or one stock—caused the entire difference. The funds could have bought and sold holdings after December 2024. A precise explanation would require stock-by-stock performance attribution and portfolio changes through the period.

Market leadership changed after 2024

There was a broader shift as well. The Nifty Smallcap 250 TRI rose 27.21% in 2024, then fell 5.48% in 2025. The Nifty Midcap 150 TRI gained 24.46% in 2024, but just 5.98% in 2025. Meanwhile, the Nifty 100 TRI returned 12.95% in 2024 and 10.24% in 2025.

In other words, the market stopped rewarding every part of the equity market in the same way. Funds positioned for one environment could find themselves in a less favourable one the next year.

Starting valuations matter, too. NSE data puts the Nifty Midcap 150's price-to-earnings ratio at 43.30 at the end of 2024, compared with 33.56 at the end of 2025. That does not tell us the valuations of these specific funds, and changes in earnings and index composition also affect P/E. But it does highlight why buying after a powerful rally can be different from participating in it.

A fund's journey matters as much as its latest return

Motilal Oswal Midcap's NAV was ₹128.2707 at the end of 2024. By 31 March 2026, it was ₹92.9568—a fall of about 27.53% from that starting point. It subsequently recovered to ₹108.6049 on 23 October, but remained below the December 2024 purchase NAV.

That journey matters because an investor does not experience returns only on 31 December. They also experience the falls, recoveries and uncertainty in between. A fund showing a positive end-to-end result can still have a difficult journey.

The portfolio itself can change, too. Motilal Oswal Midcap's reported assets rose from ₹26,421.09 crore at end-2024 to ₹40,207.50 crore in September 2026. Its September 2026 factsheet also names equity managers appointed in January 2026. Those are relevant details for understanding today's fund, not proof that assets or management changes caused its earlier losses. In particular, 2026 appointments cannot explain a 2025 return.

Does a Five-Year Mutual Fund Return Tell the Whole Story?

The entry date can change what even the same fund means to two investors.

Consider Motilal Oswal Midcap again. One investor started before its exceptional 2024 rally; another started after it. Both held exactly the same fund and are measured on the same ending date.

The first investor participated in the strong 2024 return and still retained part of that gain. The second began after the rally and had no earlier gains within that investment to cushion the later fall.

This is also why a fund's five-year CAGR needs context. CAGR compresses one start date and one end date into a single annualised number. It doesn't mean the fund generated that return every year, or that someone entering now will receive the same result over the next five years.

Rolling returns offer a broader historical view by testing multiple holding periods of similar length. Looking at weak periods, median outcomes and how often a fund beat its own total return benchmark is more informative than relying on a single trailing return. Even rolling returns describe history, not the future.

Do Top-Performing Mutual Funds Usually Stay on Top?

The 12-fund example shows what happened to a particular group of 2024 winners. A broader question is whether previous leaders generally retain their position.

FundsIndia's October 2026 Wealth Conversations analysis found that, on average, only 21% of equity funds that were in the top quartile over one five-year period remained in the top quartile over the next five years. The corresponding persistence figure for three-year periods was 26%.

A top-quartile fund is simply one ranked among the highest-returning 25% in the study's universe. The study pools diversified equity categories and examines ranking persistence. It does not establish that the other 79% lost investors' money. It also does not tell us the probability of a particular midcap fund making a loss. Details of fund counts, plan selection and treatment of mergers could not be fully verified from the reproduced persistence chart.

There is another useful test: did active funds beat a relevant benchmark? S&P Dow Jones Indices' SPIVA India Mid-Year 2026 scorecard found that approximately 85% of active large-cap funds underperformed the S&P India LargeMidCap over the five years ended June 2026. The corresponding figure for active mid-/small-cap funds was approximately 55%, measured against the S&P India SmallCap.

These two studies answer different questions. FundsIndia measures whether past leaders kept their ranking. SPIVA measures whether active funds beat specified benchmarks. Neither reveals what a particular investor earned after entering a specific scheme at a specific NAV.

A fund can produce a positive return and still lag an index. For example, WhiteOak Capital Large Cap gained 9.49% in 2025, while the Nifty 100 TRI rose 10.24%; that Nifty index is a category comparator here, not a claim about the fund's official benchmark. A fund can also drop out of the top quartile without delivering a negative return. And an investor can lose money in a fund that has an impressive long-term track record. Those outcomes shouldn't be confused.

How Should Investors Choose Mutual Funds Beyond Past Returns?

Past performance should be a starting point for investigation, not the final selection rule. Before drawing conclusions from a returns leaderboard, look at:

• The investment goal and time horizon: Can the money stay invested through a prolonged equity-market decline?
• Category and benchmark: Are the funds being compared genuinely similar, and how have they performed against their disclosed TRI benchmarks?
• Rolling returns and downside risk: How did returns vary across different periods? How deep were past declines, and how long did recovery take?
• Portfolio concentration and overlap: Is the portfolio dependent on a handful of stocks or sectors? Does it duplicate existing investments?
• Current strategy and fund managers: Does today's portfolio still resemble the one that produced the impressive historical record?
• Costs and plan type: Are the figures consistently for Direct or Regular plans, and are expense ratios understood correctly?

One detail often gets missed: a fund's published NAV already accounts for its operating expenses. Subtracting the expense ratio again from a return calculated using NAVs would count that cost twice. For more on this, see INDmoney's expense ratio explainer.

Investors can use INDmoney's mutual fund comparison tool to compare fund characteristics, then check the latest dated AMC factsheets for portfolio and manager details.

Should Investors Ignore Past Mutual Fund Returns?

No. Past returns are useful because they show what a fund actually experienced, which market conditions suited it and what kind of risk accompanied the gains. The problem begins when a past return is treated as a promise of what comes next.

The funds that led in 2024 tell a more interesting story than simply saying winners turn into losers. Some went on to deliver gains. Some declined. Some recovered but had still not made up their earlier losses by 23 October 2026.

The better question, then, is not just “Which mutual fund gave the highest return?” It is “What produced that return, what does the fund own today, and does that risk fit the investor's goal?”

Because the return earned by a new investor doesn't begin with the fund's best year. It begins at the NAV they actually pay.