This episode challenges the common question of 'which mutual fund is best' by analyzing FlexiCap fund data over 10+ years. It reveals that 14 out of 18 funds beat the benchmark, yet even top funds underperform a quarter of the time, emphasizing process, philosophy, and diversification over chasing past performance.
Summarized by Podsumo
14 out of 18 FlexiCap mutual funds outperformed their benchmark over 10+ years, but the range between best and worst was a significant 9% per year.
Even the best fund underperformed its benchmark 25% of the time, meaning investors frequently feel regret, which is described as the 'price of admission' for active investing.
A 'reactive investor' who sells after a 5% underperformance would have underperformed a buy-and-hold strategy in 17 out of 18 funds, highlighting the danger of timing decisions.
Deepak advises dividing investments into a 'core' (diversified, long-term funds like multi-asset or FlexiCap) and a 'satellite' (small bets on sectors or themes), with the core being the majority and the satellite providing excitement without derailing the main plan.
Tax impacts from rebalancing can erode returns significantly; for long-term horizons, minor underperformance (<1%) may not warrant selling due to tax costs, while 3%+ underperformance may justify a switch.
"The more frequent a fund keeps underperforming its benchmark, the worst it probably is. That might be one indicator of whether a fund is likely to deliver a reasonable alpha for you over the long term. — Anoop"
"If an active fund also underperforms its index by 25 basis points, it's exactly equal to the index fund. So you should not be comparing to the index; you should be comparing to the best comparative index fund in that category. — Deepak"
"The question of which is the best mutual fund to buy is more like what's the best mutual fund strategy or approach to take for the next 20 years. That is a much easier question to answer than which is the best mutual fund. — Deepak"