Deep Dive – The 1-year Return Trap

Stop focusing on short-term wins! An analysis done by HDFC Tru, spanning mutual fund data from 2005 to 2025, shows that a fund’s recent stellar performance especially its 1-year return is often a misleading boost that inflates its overall record and doesn’t reliably predict future success. The main lesson is to resist the urge to “chase” the current top-ranked funds; true investing strength comes from consistency over the long haul, not from a single, spectacular sprint.

The 1 Year Return Trap

Imagine you’re an investor, and an equity asset manager approaches you, showcasing a set of brilliant returns. They’re in the middle of a “purple patch”, a period of excellent, recent outperformance—and they’re eager to show off. They present periodic returns (1-year, 3-year, 5-year) stacked against the market benchmark and their competitors. You look at the numbers, and they all look impressive. This happens because the manager’s incredible recent outperformance (the 1-yr return) simply folds into and inflates the 2-yr, 3-yr, and 5-yr performance as well. Also, often the time proven schemes go through temporary rough patch. In such situations, the fund manager could be under pressure to change selection thesis.

In this study, we evaluated the efficacy of looking at only the recent outperformance. One year return folds into other period returns. As indicated above, the funds who hit a purple patch (recent outperformance – 1 year return in this case) approach investors and showcase them periodic returns as against the benchmark / peer group. Our study clearly demonstrates that recent outperformance (1 year in this case) folds into 2 yr, 3 yr, 4 yr, 5yr returns as well and thereby tends to inflate them.

Main conclusions

• Recent outperformance folds into periodic returns (2yr, 3 yr, 5yr).
• Higher periodic returns do not imply consistency in fund’s performance.
• Selecting funds on basis of recent outperformance does not ensure future outperformance.

To see full report and study : https://hdfc-tru.com/wp-content/uploads/2025/09/Deep-Dive-The-1-Year-Trap-1.pdf

Source : HDFC-Tru  email :tru@hdfcsec.com Ph: 919930203944

Disclaimer : This content is only for informational purpose. It does not make any recommendation to act or invest.