In our investing journey, most of us have done it: We scan returns, find the top performing fund or fund with highest alpha, and jump in. We expect the top performer to be the best next year. But here’s the catch, chasing yesterday’s alpha without a clear “why” is a fast way to end up with a portfolio that doesn’t match your actual needs.
While this can work for you in a short term, delivering you the returns that you once planned, it won’t work consistently. Alpha measures the fund manager’s “extra skill” is the excess risk adjusted return that the fund delivered over its benchmark. As markets mature and becomes efficient, consistently squeezing out alpha gets harder.
What do you do? Switch to next top performing fund. This action gets repeated till you have a portfolio that has a lot of schemes, you don’t know any other reason for investing in the fund, and the diversification benefits is lost as portfolio overlap is too high.
Today we help you fix this – simply and practically.
Quick Summary:
- Chasing last year’s alpha is unreliable – alpha persistence falls as markets mature, and most Indian large-cap funds struggle to beat benchmarks consistently.
- Use a low-cost passive core for large caps; add active only with a clear, durable edge.
- Make choices goal-first, not return-first: map timelines to assets
- For overseas education or foreign-currency goals, include global/US index exposure to naturally offset INR depreciation over long periods.
- Apply the 3×3 Rule.
Alpha is Rare: Most Managers can’t find it
A 2024 End SPIVA India report which measures the performance of actively managed funds relative to benchmarks over various time horizons, showed that a majority of large cap funds failed to outperform their benchmarks. 60% of all the actively managed funds in India underperformed the S&P Large and Mid-Cap Index. The following image summarises the results across the reported categories.
Source: S&P Global, EduFund Internal Research
Even in 2023, more than half i.e. 52% of the large cap funds lagged the S&P BSE 100; their benchmark despite a strong market.
How do managers generate Alpha?
You now understand that generating Alpha is difficult but how do Fund Managers generate alpha? In simple words, Alpha is basically an investor earning an additional return over the other investors because the investor believed the investment had more value than what the market / other investors were perceiving it to be.
For the Fund Manager, they can generate Alpha just like this by spotting investment opportunities which the overall markets cannot. Let’s see a few examples of how a Fund Manager can generate Alpha.
- Fund Manager believes a certain asset / investment can be allocated more/less weight in the portfolio than what the benchmark / market has weighted because the fund manager believes the asset is undervalued / overvalued.
- Fund Manager has better and more valuable information about the investment or asset than the overall market and hence he believes the investment can be made.
If you notice, the opportunity for the fund manager to generate alpha lies where there are multiple opinions, information asymmetry, or value that can be generated over time by tracking the investment opportunities very closely.
This opportunity gets lower with time in the large cap space as increased information is made available and more investors start closely tracking the companies. Think of it as there is a lucrative offer on iPhone with limited stocks on a particular website or store. As more people get to know about it and claim it, the offer would soon go away as available stock decreases.
How does it concern you?
When you buy a fund just because it topped the returns charts, you are answering “what to buy” but not “why to buy it”. Without this why:
- You might invest in a fund that recently delivered high alpha, assuming a repeat. If the market turns volatile or fund quality worsens, your money takes the hit – wrong tool, wrong job.
- You end up with multiple overlapping funds, higher costs, and no clear path to your target outcomes.
The Solution: Easy Mode
If you are a beginner investor, looking to invest in Mutual Funds but do not have the knowledge or the time to do research before investing, Passive Funds can be a smart and easy choice. These funds are low-cost funds, requiring little research and a perfect choice for someone who wants to begin their investing journey at a fraction of cost of active funds.
You can consider Active Funds in the Small Cap or Mid Cap category for long-term investments where there is still opportunity for the Fund Manager to generate Alpha.
The Real Solution: Pro Mode
Here’s the switch that will help you shift gears in your investing journey: Start with your goals, and not with the past winners.
- List down your goals for which you are investing along with their timelines:
List down the reasons you are investing for. It can be as simple as buying a new car. Estimate the target date. Divide these goals in short term, medium term, and long term.
- Estimate Future Costs:
Estimate the current cost, factor in inflation to arrive at a future cost. You can use EduFund’s College Cost Calculator to estimate future cost for your child’s education.
- Map assets and savings to these goals:
Allocate your existing assets and your regular savings to goals. A simple guide to this could be:
- For Short Term Goals: Prefer Debt or Balanced Investments depending on your risk appetite. Avoid pure equity. Shift to safer funds as goal date nears.
- For Medium Term Goals: Prefer a mix of assets along with a little bit of equity to help you grow your investments faster by taking a little additional risk.
- For Long Term Goals: Depending on your risk profile, you can invest in equity funds as the goals are far and can sustain volatility. Shift to safer funds as goal date nears.
- Use International Funds for Global Goals:
Young parents planning for their child’s education in U.S.A or any other country abroad face a currency mismatch as they save only in INR while the expense will be in USD or other currency. Complementing Indian investments with US Funds or Global Equity Funds helps create a hedge against the rupee depreciation over long period.
If you want to read more about Goal Based Investing, our article on the same helps you understand about it in detail.
The 3X3 Rule of Thumb
3 Questions: What is the goal? When is it due? How much would the goal cost?
3 Buckets: Safety (Debt), Stability (Hybrid Fund, Multi-Asset Fund),Growth(Equity)
3 Habits: Regular SIP, Annual Rebalancing, and review the “why” before switching funds.
Closing Notes
Chasing Alpha or High Return funds will help you deliver returns in short term, but earning high returns through these methods consistently is rare. Instead of building a portfolio around Top Performing Mutual Funds or High Alpha Mutual Funds, build one around your life goals.
Doing this, you won’t need to chase funds. You’ll have a plan that will help you fund that matters in your life – on time, with fewer surprises.
Disclaimer: The data in this presentation are meant for general reading purpose only and are not meant to serve as a professional guide/investment advice for the readers. This presentation has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been suggested or offered based upon the information provided herein, due care has been taken to endeavor that the facts are accurate and reasonable as on date. The information placed on the presentation is for informational purposes only and does not constitute as an offer to sell or buy a security. The Company reserves the right to make modifications and alterations to the content available on the presentation. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. The EduFund platform & the website is owned, operated and maintained by Helena Edtech Private Limited, a company incorporated under the laws of India. An affiliate of the Company, i.e. Edubillions Tech Private Limited is registered with AMFI as mutual fund distributor bearing the registration number ARN258733. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The valuation of securities may increase or decrease depending on the factors affecting the securities market.
About the author
Niraj Satnalika
Head Of Research,EduFund
Dr. Niraj is a finance professional with 12+ years of experience and is part of the founding team at EduFund. He’s worked with Goldman Sachs, CRISIL and Sakal Media in roles spanning investment management, research and leadership. With a PhD in Finance from IIT Bombay, he brings deep expertise in valuation, governance and education planning. When he’s not teaching or writing, you’ll find him cooking or going on long drives.
