The Winners That Stayed and the Losers That Vanished: The Hidden Survivorship Bias in Mutual Fund Returns

 At a cousin's engagement dinner last month, Arjun could not stop talking about his mutual fund. He pulled out his phone, showed the screen to anyone who would look, and said the same line three times over the course of the evening: fifteen years, and it has compounded at nearly 18 percent. Everyone nodded, impressed. Nobody in that room, including Arjun, stopped to ask a more uncomfortable question. Out of every fund that existed in that same category fifteen years ago, how many are still around today to even be compared against. The answer, as it turns out, is a much smaller number than most people assume, and the funds that vanished did not vanish because nothing happened to them. They vanished because they lost, badly, and were then folded quietly into better performing siblings, taking their entire embarrassing history down with them.

Most investors assume that a long track record, by itself, represents a fair picture of how that fund's category has generally performed. Fifteen years is a long time, the thinking goes, so this number must reflect the real, average experience of investing in a fund like this one over that period. This feels reasonable. It is also based on an incomplete picture, because the number being celebrated only includes the funds that survived long enough to still be measured.

The Bombers That Never Made It Home

The clearest explanation of this problem does not come from finance at all. It comes from a Hungarian-American mathematician named Abraham Wald, who worked with the American military's Statistical Research Group during the Second World War. Bomber aircraft were returning from missions riddled with bullet holes, mostly concentrated around the wings and the fuselage, and the natural instinct among military officers was to reinforce armour precisely in those bullet-ridden areas, since that is clearly where the planes were getting hit. Wald disagreed, and his reasoning turned the problem upside down. He pointed out that the military was only looking at the planes that had made it back. The bullet holes visible on those returning aircraft showed exactly where a plane could be hit and still survive the flight home. The real danger areas were the ones with no bullet holes on the surviving planes, because any aircraft hit there never returned to be studied at all. The armour, Wald argued, belonged where the damage was missing, not where it was visible.

This single insight, that a dataset built only from survivors can actively mislead you about the very thing you are trying to measure, became known as survivorship bias, and it shows up again and again far outside the battlefield, in exactly the sort of place where Arjun was proudly showing off his phone.

Survivorship bias does not belong only to finance. We admire billionaires without counting failed entrepreneurs, study bestselling books without noticing the thousands that never found readers, and celebrate legendary investors without asking how many others with similar skills and ambitions quietly disappeared after one disastrous decade. Mutual funds are simply another place where the winners remain visible while the losers gradually fade from view.

How This Plays Out Inside a Fund House

Apply Wald's logic directly to mutual funds and the mechanism becomes easy to see. When a fund performs badly for long enough, it rarely gets flagged publicly as a failure. Instead, something quieter happens. The fund house merges it into a better-performing sibling scheme within the same category, and under standard industry accounting, the underperforming scheme usually ceases to exist as a standalone track record, making it much harder for investors to observe its independent historical performance. The surviving fund keeps its own track record exactly as it was, as though the merged scheme had never existed. An investor scrolling through fund comparison websites today sees a clean, rising line and has no way of knowing that the entity behind that line was quietly rebuilt on the remains of a fund that lost a large share of its investors' money.

This is precisely why a category average calculated only from currently existing funds tends to look better than what an investor starting out at the beginning of that period actually experienced. Some of the money that started that period is not being counted anymore, because the fund carrying it no longer exists under its own name.

The Numbers Behind the Graveyard

The S&P Indices Versus Active (SPIVA) India Scorecard, published twice a year by S&P Dow Jones Indices, is designed to reduce the effects of survivorship bias by including both surviving and non-surviving funds in its analysis. Across multiple categories and over longer investment horizons, the reports consistently show that a large proportion of active funds fail to outperform their respective benchmarks, while also documenting meaningful fund attrition through mergers and liquidations. This makes SPIVA's methodology a more representative reflection of what investors in a fund category actually experienced than analyses based only on funds that still exist. Academic studies have similarly shown that survivorship bias can inflate reported average fund performance by around 1 to 1.5 percentage points per year, creating the illusion of returns that many investors never actually experienced.

Separate analyses of the AMFI scheme database suggest that, of the more than four hundred equity mutual fund schemes currently available to investors, only a small minority have an unbroken, standalone track record stretching back before the 2008 financial crisis. Most were either launched after 2008, during the long bull market that followed, or have since been merged, renamed, or restructured as the industry evolved. Well-documented examples include Kothari Pioneer's absorption into Franklin Templeton, Alliance Mutual Fund's merger into Birla Sun Life in 2004, PNB Mutual Fund's merger into Principal in the same year, Morgan Stanley India's absorption into HDFC Mutual Fund in 2014, and BOI AXA Mutual Fund's merger into SBI Mutual Fund in 2022. These events did not erase history, but they did remove those schemes as independent track records, making it much harder for investors comparing funds today to see the full picture of how all the original schemes actually performed.

Why This Matters to Arjun, and to Everyone Else

None of this means Arjun's fund is secretly bad, or that his fifteen years of real returns were fabricated. What it does mean is that the "average fund in this category returned so much over fifteen years" claim that gets thrown around casually at dinner tables and in WhatsApp forwards is quietly built on a shrinking, self-selected group of winners. The losers from that same period, the funds that fell hardest and never recovered, are simply no longer part of the conversation, because they are no longer part of the data. A fair comparison would need to include them, the way SPIVA India's methodology deliberately does, precisely because Wald's bombers taught statisticians that the ones who did not come back are often more informative than the ones who did.

Where the Comparison Deserves Care

It would be a mistake to walk away from this thinking every long track record is meaningless, or that every merger is a cover-up. Mergers happen for many legitimate business reasons, including regulatory requirements like SEBI's 2017 to 2018 categorisation and rationalisation exercise, which alone forced several hundred scheme mergers across the industry to reduce genuine overlap and confusion among near-identical funds. Some of the specific attrition figures cited above come from independent analyses of publicly available AMFI and SPIVA data rather than from a single official government census, so they are best treated as well-sourced estimates rather than exact figures down to the decimal. The broader lesson stands regardless of the precise percentage. A single fund's glowing long-term number tells you about that one survivor. It does not, by itself, tell you what an ordinary investor entering that category at the same starting point could actually have expected.

The Money Vichara Reflection

Arjun's fund may well continue to do exactly what it has always done, and there is nothing wrong with him being pleased about it. What is worth changing is the habit of treating one surviving fund's long track record as though it represents the full, honest history of everyone who tried that same category at the same time. The next time a fifteen-year return gets flashed across a dinner table or a family group chat, it may be worth asking a quieter, less impressive question in return. How many other funds started this same journey back then, and where are they now.

Investing is not only about asking which fund survived. It is also about asking which stories quietly disappeared before anyone thought to count them.

That is the real vichara.

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This blog shares personal opinions for educational purposes only. The author is not registered with SEBI. This is not financial advice. © 2026 Money Vichara.