When yesterday's returns fool today's investors

The funny thing about recency bias is that it tricks you into ignoring hard evidence and convinces you that your most recent experience is the only truth. But when you let that bias dictate your investments, you set yourself up for some financially fatal mistakes.

You invest in a mutual fund just by looking at last year’s returns because your friend owns it and has been tom-toming about it ad nauseam. And then, a couple of years later, you discover that yesterday’s hero has become today’s dud.

That’s exactly what a study by PGIM India Mutual Fund reveals, highlighting just how unreliable recent performance can be as a guide to future returns. The study tracked the top 10 equity mutual funds in 2014 and mapped how their rankings shifted each year through 2025.

For instance, Fund A, which topped the equity fund rankings in 2014 based on annual returns, retained its position in 2015 but crashed to 128th place in 2016. Fund B, ranked second in 2014, slipped to 37th in 2015 and then to 141st in 2016. Fund C, the third-ranked fund in 2014, moved up to second place in 2015, fell to seventh in 2016, and then slid further to 46th in 2017.

Clearly, if you invest in a mutual fund with only a short rear-view mirror, you are bound to make mistakes. You need to ensure that funds can perform consistently over longer periods and are not merely riding a particular investment style that happens to suit one phase of the market. When you invest in a long-term product, your line of enquiry also needs to be long-term.

Jash Kriplani walks you through the PGIM study in this story to explain why historical rolling returns are a better dataset for evaluating funds compared to point-to-point recent returns, which are widely advertised on investing platforms. Rolling returns measure performance over multiple overlapping periods, for example, daily three-year returns calculated daily over several years.

However, this is not where you stop: studying investment styles, the fund management team, and risk ratios provides a far more comprehensive picture. Together, these data points underline the importance of diversification given categories and styles rotate, the safer choice is to diversify.

Another important story worth your time is the recent spate of SMS alerts and emails from the income tax department to several salaried taxpayers, flagging discrepancies in deductions and exemptions claimed in their income tax returns (ITR).

This happened primarily because the employees submitted fewer deductions to their employer– on the basis of which tax was computed and deducted–while claiming a much higher set of deductions at the time of filing returns, resulting in hefty refund claims. Form 16 reflects the original submissions, flagging such mismatches for the taxman.

The department is now raising queries on this practice. In this story, Shipra Singh explains why, as a matter of good tax hygiene, you should always submit investment proofs on time so that Form 16 aligns with your ITR and avoids unpleasant surprises.

Maulik M. wrote about the poor uptake of the corporate National Pension System (NPS) even when from a taxation perspective it makes sense for an employee. Even under the New Tax Regime, which does not allow for most deductions, an employee can claim a deduction for their employer’s contribution to NPS of up to 14% of basic pay plus dearness allowance (DA).

Under the old tax regime, the 14% limit for employer contributions applies only to government employees. For others, it is capped at 10%. Additionally, employees can claim deductions for their own NPS contributions, up to the ₹1.5 lakh limit under Section 80C, plus an additional ₹50,000 under Section 80CCD(1B).

Given the recent reforms in NPS, we spoke about it at length in the previous newsletter, it merits consideration and Maulik M. tells you how to navigate this space in this story.

In the spending space, Anagh Pal examines the double whammy of inflation and currency depreciation on overseas education. Studying abroad has become significantly more expensive, and the return on investment is also under pressure as many graduates struggle to land jobs even after adding a foreign degree to their CVs.

A weakening rupee has sharply pushed up real costs, with tuition and living expenses in dollar terms translating into much higher amounts in rupees. This is forcing students and families to rethink their funding plans..

In such a scenario, financial prudence is critical. Avoid breaking the bank or diverting money meant for other goals, make use of education loans and consider building global exposure so that part of your portfolio benefits from rupee depreciation. Find more details here.

And finally, we wrap up week two of the New Year with Shefali Anand charting out your money goals for 2026. She talks about an approach-oriented framework that helps you avoid FOMO in your financial life, go slow on debt, and build the discipline needed for consistent saving and investing. Read it here.

Meet you next week and in the meantime if you have feedback, ideas or doubts write to me at deepti.bhaskaran@livemint.com

Deepti Bhaskaran is editor, Mint Money, with close to two decades of experience as a personal finance journalist. Her work reflects a strong focus on financial literacy, consumer protection and practical money management.