Stop Chasing Top Funds: Kalpen Parekh on Mutual Fund Selection

Key Points

• SIP investors have faced a difficult 2–2.5 years, but the speaker advises staying calm through volatility.
• Alpha is volatile and non-linear and tends to revert toward the mean. Buying a fund or asset class after a strong run of alpha may mean entering near the end of its cycle.
• Look for capable, consistent fund managers whose funds are temporarily out of favor, and assess whether the potential drivers of future alpha remain in place. The speaker cautions against confusing a manager’s temporary slump with a broken investment approach.
• Don’t assume alpha is easier to find in one market-cap segment. The speaker says that over the prior 2–3 years, 70–80% of large-cap funds generated alpha, while 85–90% of mid-cap funds did not. The speaker also notes that the Nifty Midcap 100 and most mid-cap funds were at all-time highs as of the day before the discussion.
• Consider diversifying across asset classes, countries, geographies, and investment styles, rather than making categorical bets based on recent performance. The speaker points to changing relative performance among India and markets such as Taiwan, Korea, China, Europe, and the US.
• Valuation matters: buying at a reasonable or fair valuation is more likely to support long-term returns than buying at an excessive one.
• Performance-chasing can hurt investors, even in a highly successful fund. The example cited was Peter Lynch’s Fidelity fund: it reportedly returned about 28–29% per year, while the average investor earned around 7%. A significant number of investors reportedly lost money after buying following strong performance and selling after subsequent declines.
• The speaker describes a bear market as potentially five years of zero returns, distinguishing it from a short spell of roughly 5% negative returns.

Framework Shared

• Ask what generates alpha before deciding whether a fund has it.
• Evaluate a manager’s track record, investment principles, and likely sources of future alpha—not just trailing returns.
• Look for proven managers or strategies that are currently out of form, while checking that the potential performance drivers remain.
• Spread investments across markets and styles, and avoid basing decisions on recent winners or losers.
• Consider valuation when investing; avoid paying excessive prices.

Figures and Examples Cited

• Warren Buffett was said to have produced 8% alpha over the S&P 500 over 65 years, but no alpha over the last 20 years. The speaker used this to illustrate that alpha can vary over time.
• The discussion refers to India’s relative underperformance and the strong performance of other international markets, without giving comparative return figures.

Assets and Markets Mentioned

• Investments: Mutual funds, SIPs, large-cap and mid-cap funds, the Nifty Midcap 100, and the S&P 500.
• Markets and geographies: India, Taiwan, Korea, the US, China, and Europe.
• No explicit financial-advice disclaimer was stated.

Presenters and Sources

• Presenters: Kalpen Parekh (identified in the video title) and Sonia Shenoy.
• The Peter Lynch example references his Fidelity fund and the book Beating the Street. The subtitle rendering of the title is unclear.