Recency Bias: Why Past Winners May Not Repeat
The fund or stock that performed best last year is easy to notice. It appears on ranking tables, social media posts and informal discussions. Recency bias begins when the latest result starts feeling like the most reliable result.
For investors, recent performance is useful information, but it is not a complete investment process. A winner can repeat, pause, underperform, or become too risky for the investor's goal.
Recent Performance Is Only One Clue
A strong recent return may come from skill, a favourable sector cycle, a style tailwind, a concentrated position, currency movement, interest-rate changes, or simply a period when the market rewarded one type of risk. Without understanding the reason, an investor may buy yesterday's outcome instead of tomorrow's suitability.
This matters because investor behaviour is often affected by short-term experience. SEBI's Investor Survey 2025 reported that among dormant investors, poor performance affected 93%, volatility in the market affected 66%, significant financial losses due to market corrections affected 52%, and significant financial losses due to wrong product choice affected 51%.
| Dormant-investor factor | Reported share | Recency-bias lesson |
|---|---|---|
| Poor performance | 93% | A recent winner can become a recent disappointment if expectations are not realistic. |
| Volatility in the market | 66% | Short-term return chasing often ignores the volatility needed to earn that return. |
| Significant financial losses due to market corrections | 52% | Buying after a sharp rise can leave less margin for disappointment. |
| Wrong product choice | 51% | A product can have strong past returns and still be unsuitable for a specific investor. |
Why Past Winners Change
Markets rotate. A sector that led one year may lag later. A fund manager's style may work in one phase and struggle in another. A small-cap or thematic fund may look attractive after a strong run, but the same category may also carry higher volatility and liquidity risk.
AMFI's investor education material warns that mutual fund ratings are dynamic and based on performance over time, which itself is subject to market fluctuation. A top-rated scheme today may not maintain the same rating later. AMFI also states that historical performance is for reference and is not a future-return promise.
SEBI has also highlighted the role of cognitive biases. In a 2026 speech on information asymmetry, SEBI noted that investors may interpret the same facts differently because of biases such as anchoring, confirmation bias, overconfidence, optimism and fear of missing out. Recency bias is closely connected: the latest result becomes the anchor, and the investor searches for reasons to justify it.
What Long-Term Scorecards Show
SPIVA India Year-End 2025, published by S&P Dow Jones Indices, is useful because it compares active fund categories across one-year, three-year, five-year and ten-year horizons. The report showed that short-term outcomes can look very different from decade-long outcomes.
| Fund category | 1-year underperformance | 10-year underperformance | What an investor should notice |
|---|---|---|---|
| Indian Equity Large-Cap Funds | 75.0% | 76.3% | A recent ranking alone may not prove durable advantage in a competitive segment. |
| Indian ELSS Funds | 69.2% | 82.9% | Tax-saving decisions should not be based only on recent return tables. |
| Indian Equity Mid-/Small-Cap Funds | 12.1% | 79.0% | A strong recent category result may not describe the full cycle. |
| Indian Composite Bond Funds | 31.7% | 96.5% | Interest-rate cycles can make short-term debt-fund results misleading. |
The point is not that active funds, mid-caps, ELSS, debt funds or any other category should be avoided. The point is that one recent period is not enough. Investors should review mandate, benchmark, riskometer, portfolio concentration, expense ratio, manager process and fit with the goal.
A Better Way To Review A Recent Winner
Before selecting a fund, stock or investment theme because it recently performed well, ask five questions:
- What caused the recent return: broad market movement, sector concentration, style exposure, credit risk, interest-rate movement, or manager skill?
- Has the investment performed through different market phases, or only in one favourable period?
- Does its risk profile match the investor's goal, time horizon and ability to tolerate drawdowns?
- Is the investor adding after a rise only because others are discussing it?
- What role will it play in the total portfolio, and what would trigger a review or exit?
This changes the decision from "What did best recently?" to "What belongs in my plan?"
What The Infographic Shows
The visual shows the safer sequence: keep the recent chart visible, but place it beside long-term records, risk profile and goal documents. The recent winner is still considered; it is simply not allowed to become the whole decision.
Investor Checklist
Use this pause before chasing a recent winner:
- Compare performance across one, three, five and ten years where data is available.
- Compare against the correct benchmark, not only peer rankings.
- Check riskometer, portfolio concentration, liquidity and costs.
- Read the scheme document, factsheet, offer document or exchange filing.
- Decide allocation size before buying.
- Avoid replacing a suitable long-term holding only because another option had a better recent period.
Recency bias is natural. A disciplined review process is how investors reduce its damage.
Source Links
- SEBI Investor Survey 2025 - Main Report and Data
- SEBI Investor Survey 2025 Main Report PDF
- SEBI speech on information asymmetry, social media noise and cognitive biases
- SPIVA India Year-End 2025, S&P Dow Jones Indices
- AMFI: Myths and facts about mutual funds
- AMFI: Risks in mutual funds
Reviewed by Abhipra Research / Compliance Team.
Disclaimer
This article is for educational and informational purposes only. It should not be considered investment advice, trading advice, tax advice or insurance advice. Investments in securities market are subject to market risks. Please read all related documents carefully before investing. Past performance is not indicative of future returns. Please consult a qualified financial advisor, tax advisor or insurance advisor before making any financial decision.
