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Introduction
It’s tempting to assume that a fund which performed well recently will continue to do so. That’s recency bias — a cognitive shortcut where recent events heavily influence decisions.
In mutual fund investing, this often means buying into funds at their peak performance, only to suffer when reality corrects. Let’s explore this trap with a real-world story of Raj and his trending fund mistake.13/06/2025
Recency bias is the tendency to:
· Overweight recent performance while ignoring long-term track record
· Assume short-term winners will stay winners
· Neglect risk, asset quality, or valuation
This often results in poor entry timing and unrealistic return expectations.
Real-Life Example: Raj and the Top Fund Trap
In early 2022, Raj saw a small-cap fund deliver 40%+ returns in the previous year. Impressed, he invested ₹3 lakhs without checking past volatility or fund fundamentals.
But markets corrected, small-caps slumped, and the fund fell by 18% in the next 12 months. Raj’s CAGR after 2 years was just 5.2%.
Had he chosen a diversified flexi-cap or balanced fund, his return might have been closer to 9–10% with lower downside.
Key Takeaways
| Behaviour | Recency Bias | Long-Term Thinking |
|---|---|---|
| Decision Trigger | Recent high returns | 3–5 year performance, volatility |
| Fund Choice | Popular, overbought funds | Well-rated, consistent funds |
| Outcome | Enter at peak, underperform | Enter at fair value, grow steadily |
Conclusion
Past returns are just one piece of the puzzle. Relying solely on them invites disappointment. Instead, combine performance, volatility, consistency, and investment goals for smarter fund selection.
Don’t chase trends. Evaluate mutual funds on fundamentals, not just flair. Look at long-term returns, risk metrics, and fund manager style before investing.
Summary Table: Recency Bias – Past Returns Trap
| Investor Type | Avg. Return (3-5 Yr CAGR) | Avg. Risk (Volatility) | Avg. Investor Behaviour |
|---|---|---|---|
| Recency Bias Investor | 5% – 7% | High | Enters late, chases past winners, exits in panic |
| Disciplined Investor | 9% – 11% | Medium | Checks 3–5 year data, selects diversified funds |
| Passive Trend Follower | 6% – 8% | High | Follows news tips, lacks due diligence |
Dr. Satish Vadapalli
Research Analyst
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