One of the biggest investing mistakes is also one of the most logical ones. Most investors believe that an investment which has delivered strong returns in the recent past is more likely to perform well in the future. Likewise, investments that have struggled are often seen as best avoided. It feels like a sensible way to make investment decisions because recent winners appear safer and more reliable.

However, markets rarely reward decisions based solely on what happened yesterday. Past performance helps us understand how an investment has performed, but it is rarely the best way to judge what it can deliver in the future.

The recency bias

As investors, we naturally give more importance to recent events than those that happened several years ago. Strong returns create confidence, headlines and conversations — making an investment appear safer than it actually is. This behavioural tendency, known as recency bias, often leads investors to invest only after prices have already risen significantly.

Gold and silver provide a recent example of this behaviour. After both precious metals generated exceptional returns, Gold ETFs witnessed record monthly inflows of around ₹24,000 crore in January 2026 as investors rushed to participate in the rally.

Imagine an investor who ignored gold during most of its rally but finally invested after seeing record prices and reading about its exceptional performance. Over the following months, gold corrected by 20 to 25 per cent from its peak, while silver witnessed an even sharper decline of more than 50 per cent. By the time recent performance becomes the primary reason to invest, a significant part of the opportunity has often already passed.

A similar pattern

This behaviour is not limited to asset classes such as gold or silver. The same behaviour is visible in mutual funds, where many investors choose funds based mainly on their historical returns.

Every year, investors search for the best-performing fund, assuming that yesterday’s winner will continue leading the category. However, our study of diversified equity funds showed that only about one in three funds that were among the best performers in one year managed to remain among the best performers the following year.

In fact, nearly half slipped into the lower half of their category within just a year. Another interesting observation our analysis showed was that nearly one in four funds that were among the weakest performers in one year became one of the best-performing funds in the following year.

Moving in cycles

The reason for this is that markets move in cycles. Different investment styles, sectors and market capitalisations perform well at different times as market conditions keep changing. A fund that outperforms in one market cycle may underperform in the next, not necessarily because it has become a poor fund, but because the environment that favoured its investment style has changed.

This is exactly why selecting funds based only on one-year or three-year returns can be misleading. Historic returns often reflect the market conditions of that period rather than a fund’s ability to perform consistently over the long term. In many cases, the conditions that created those returns may no longer exist, making future outcomes very different from the past.

What really matters

If past performance alone is not the answer, what should investors focus on instead?

The starting point should always be the financial goal, the time horizon available to achieve it and an appropriate asset allocation strategy rather than identifying the fund that generated the highest recent return. Once this framework is in place, investors can focus on factors that provide a better indication of a fund’s future potential. Ultimately, a well-constructed portfolio is built around long-term objectives rather than short-term rankings or recent market performers.

Rather than asking, “Which fund delivered the highest return last year?”, investors should ask, “How consistently has this fund performed across different market cycles?”

For example, rolling returns show how consistently a fund has performed over time, while alpha reflects the fund manager’s ability to generate returns above the benchmark. Similarly, risk-adjusted returns show whether the returns were worth the risk taken.

Beta indicates how much a fund is likely to rise or fall compared with the broader market, while standard deviation measures how stable or volatile its returns have been over time.

Together, these measures help investors understand whether a fund has generated returns by taking reasonable risk or by exposing investors to higher volatility. Looking at these factors along with the quality of the underlying portfolio and current valuations gives a much clearer picture than simply relying on recent performance rankings.

Beyond past performance

A fund’s past performance should provide context, and not conviction. Successful investing is not about chasing what has performed in the past but about identifying investments that are better positioned to create wealth in the years ahead. Investors who look beyond yesterday’s leaderboard are far more likely to build long-term wealth than those who spend their time chasing yesterday’s winners.

The writer is director, Anand Rathi Wealth Limited