Mutual Fund Comparison

Why Point-to-Point Returns Are Misleading

Most investors compare mutual funds by looking at 1-year, 3-year, and 5-year returns. This is the worst way to evaluate a fund. Point-to-point returns depend entirely on the start and end dates chosen. A fund that fell 30% during COVID and then recovered sharply will show spectacular 3-year returns from March 2020 — but that tells you nothing about how the fund will perform going forward.

The fund that topped the 3-year returns chart in 2023 is often a concentrated, high-risk fund that got lucky on a few big bets. Past performance in specific market conditions does not predict future performance in different conditions.

Rolling Returns — The Only Honest Return Metric

Rolling returns measure the fund's performance over every possible time window of a given length within the historical data. Instead of one 5-year return figure (which depends on your specific start date), rolling returns give you the distribution of all possible 5-year returns — the best, worst, median, and percentage of time the fund outperformed the benchmark.

A good large cap fund should show: positive rolling 5-year returns 95%+ of the time, median 5-year rolling return above benchmark, and low standard deviation of rolling returns (consistency).

Tools like Valueresearchonline, Morningstar India, and PrimeInvestor show rolling returns. Freefincal's calculators are free and detailed. If you cannot find a fund's rolling returns chart, that is itself a sign the fund does not have enough history to evaluate.

Comparing Funds — The Right Metrics

Category Benchmarks — Apples to Apples Comparison

SEBI mandates that mutual funds disclose returns against their category benchmark. Large cap funds must benchmark against Nifty 100 or Nifty 50. Mid cap funds against Nifty Midcap 150. Small cap against Nifty Smallcap 250. Comparing a large cap fund to a small cap fund by returns alone makes no sense — they carry different risk profiles.

Within a category, benchmark-relative performance matters most. A large cap fund returning 14% when Nifty delivered 15% has actually underperformed. Factor in its 1% expense ratio, and you would have done better in a Nifty index fund at 0.1% expense ratio. This is why index funds have captured significant share in Indian mutual fund flows — most active large cap funds cannot consistently beat the index after costs.

Mid and small cap active funds have historically shown more alpha potential — markets in those segments are less efficient, and good fund managers have added genuine value. But volatility is also higher. Category context is everything when comparing funds.