A wealth platform must put one flexi cap fund on its recommended list. Fund A has the best five-year return but a new manager, Fund B has a long record and lower risk, and Fund C is cheap but moves almost exactly with the index. Which goes on the list?

Fund B goes on the list. It beat the benchmark by 0.9% a year with less volatility than the index, under the same manager for all five years. Fund A's higher return belongs mostly to a manager who has left. Fund C moves 96% with the index yet charges an active fee and lagged the benchmark, so an index fund would do its job more cheaply.

Imagine choosing a surgeon by a hospital's success rate, then learning the surgeon who built that record retired last year. The number is real; it just no longer describes who will operate on you. A fund's past return is evidence about the people and process that produced it, so the first question is whether those people and that process are still in place. Fund A's current manager has run it for one of the five years in its record. The other four are a different person's work.

Put each return over the volatility it took to earn it. Using an assumed 6.5% risk-free rate, the Sharpe ratioReturn above a risk-free rate, divided by volatility. It measures how much extra return each unit of risk earned. is 0.56 for A, 0.58 for B and 0.47 for C. Once risk is counted, Fund B is at least as good as Fund A, and its record is entirely its current manager's. Fund B also beat the benchmark while being less volatile than it, 15% against 17%, which is the combination a platform wants to put in front of clients who will panic in a fall.

Fund C's R-squared of 0.96 means 96% of its month-to-month movement is explained by the index. Paying 0.9% for a fund that is 96% index is paying an active fee for a small active bet, and that bet lost 0.3% a year against the benchmark. Its active risk, about 3.2% a year, is the only part of the fund the fee is buying. An index fund costing a fraction of that would deliver nearly the same portfolio. Fund C is not a bad product; it is the wrong product for a slot meant for active management.

Give the reason in one line, then the path back. Fund A stays on the watch list, not the recommended list, until its current manager has built a record of their own, usually three years. Its size is a second question worth raising: Rs 42,000 crore in a flexi cap fund limits how much it can hold in smaller companies, which is often where a flexi cap fund's edge comes from. The limit of this analysis is honest too: five years is a short sample for any fund, and Fund B's lead on risk-adjusted return is small. Its advantage is that its evidence is clean.