Window Dressing in Mutual Funds: Why Portfolios Look Different at Quarter-End

Every month a fund house publishes a full list of what each of its schemes owns. Most investors glance at the top ten holdings and move on. A few notice something odd: a stock that ran hard during the quarter suddenly shows up in the list, and a stock that had a bad few months has quietly vanished. That is the pattern people mean when they talk about window dressing in mutual funds, and it is worth understanding before you read too much into any single portfolio snapshot.

We’ll go through what the practice is, why the calendar creates the temptation, what the academic research actually found, and how you can check for it yourself with nothing more than two spreadsheets.

What window dressing in mutual funds actually means

The phrase comes from shop windows. A store puts its best stock in the glass so passers-by get a good impression, whatever is sitting in the back room. A fund manager can do something similar. Just before the date on which holdings are disclosed, they sell stocks that have done badly and buy stocks that have done well. The disclosed list then looks like the work of someone who picked the winners.

Notice what hasn’t changed. The fund’s returns for the period are already locked in. Buying a stock on the 29th of the month does not give the scheme the rally that stock had in the previous eight weeks. So window dressing doesn’t improve performance. It changes how the portfolio looks to someone reading the holdings file, and it usually costs a little money to do it.

Window dressing can’t buy past returns. It only buys a better-looking list, and the fund’s investors pay the trading bill.

Why the month-end snapshot creates the temptation

In India the disclosure timetable is set by SEBI. Under the SEBI Master Circular for Mutual Funds issued on March 20, 2026, fund houses must disclose the portfolio of every scheme, along with ISIN, as on the last day of each month. The file goes up on the AMC’s own website and on the AMFI website within 10 calendar days of the month’s close, in a downloadable spreadsheet format. Debt schemes have a tighter cycle. They have to disclose fortnightly, within 5 days of each fortnight, along with the yield of each instrument, a change Mint reported when SEBI announced it.

That is good for transparency. You can download any scheme’s holdings from AMFI’s scheme-wise disclosure page and see exactly what it owned. But it also means the market knows the precise date on which the picture will be taken. Anything a manager wants the public to see, or not see, has to be in place by the last trading session of the month.

Quarter-ends add more pressure. Performance is usually discussed in quarters, and the March, June, September and December files are the ones that line up with those reviews. If a manager is going to tidy the window, those are the obvious months to do it, and as the research below shows, that is roughly what the data picked up.

What the research found

The idea isn’t just market gossip. One of the earliest studies was a 1991 paper by Josef Lakonishok, Andrei Shleifer, Richard Thaler and Robert Vishny, Window Dressing by Pension Fund Managers, published as an NBER working paper and in the American Economic Review’s papers and proceedings that May. They looked at 769 US pension funds with total assets of $129 billion at the end of 1989. The managers tended to oversell stocks that had performed poorly, and the relative selling of losers sped up in the fourth quarter, when sponsors examined the portfolios most closely. The authors read this as evidence that managers were being judged on individual stock picks, not just on overall returns.

A later study focused on mutual funds specifically. Window Dressing in Mutual Funds by Vikas Agarwal, Gerald D. Gay and Leng Ling, published in the Review of Financial Studies in November 2014, argued that window dressing is a gamble on the gap between the quarter-end and the date holdings become public. Investors see two signals: the fund’s actual performance and the stocks it says it owns. If the fund does well during the reporting delay, the dressed-up portfolio looks like proof of skill and the fund gets higher inflows than non-window-dressers. If it does badly, investors smell what happened and the fund suffers lower flows.

The less flattering part of that paper is the profile of the funds doing it. The window dressers tended to have poor past performance, little evident skill, and high portfolio turnover and trading costs, and those traits went on to produce worse future performance. In plain words: the funds that most needed to look good were the ones paying to look good.

Both studies are about US funds and US disclosure rules, so we shouldn’t treat their numbers as a measure of how common the practice is in India. What carries over is the mechanism. Any market with a known disclosure date and investors who read holdings lists gives managers the same incentive.

A worked example with rupee numbers

Here is a made-up case to show the arithmetic. The fund, stocks and returns are hypothetical.

Say a flexi-cap scheme manages ₹2,000 crore. During the July-September quarter, one of its holdings, call it Stock A, fell 22% and now makes up 3% of the portfolio, or ₹60 crore. Another stock, Stock B, has rallied 35% over the same three months, but the fund holds only a token 1% position worth ₹20 crore.

On the last two trading days of September, the manager sells the entire ₹60 crore of Stock A and buys ₹60 crore more of Stock B. The September 30 portfolio file now shows a 4% position in the quarter’s star and no trace of the laggard.

The direct trading cost looks small, under two basis points. The real risk is in the last two rows. Window dressing is a timing decision driven by the calendar, not by the stocks’ prospects. If the beaten-down stock bounces and the hot stock cools, the scheme in our example gives up 0.75% of its assets in a single quarter. Of course the trade could also work out, but then it was a lucky call, not a considered one. Small leaks like this work the same way as plan costs, which we looked at in our piece on direct vs regular mutual fund plans.

And none of that money comes out of the manager’s pocket. It comes out of the NAV.

How to spot it in the monthly portfolio files

You don’t need a database subscription. You need three consecutive monthly files for the same scheme, which you can download from the AMC website or AMFI. Then look for these patterns:

1. Stocks that appear only at quarter-end. A name that is absent on August 31, shows up with a meaningful weight on September 30 and is gone again on October 31 is the classic sign. One instance proves little. A habit of it across several quarters says more.
2. New buys that are all recent winners. Compare the quarter’s new entries against how those stocks performed over the previous three months. If almost every addition is a stock that already ran up, and almost every exit is one that fell, the list may have been curated for appearance.
3. A jump in turnover around quarter-ends. Many fund factsheets show a portfolio turnover ratio. A scheme whose turnover is persistently high relative to peers with a similar style deserves a closer look, given what the RFS study found about the costs.
4. A story that doesn’t match the returns. If the disclosed portfolio is full of the year’s best performers but the scheme has trailed its benchmark, those two facts don’t fit together. Returns are the harder evidence.

When the holdings list and the returns tell different stories, believe the returns. The list is a single day; the NAV is every day.

What window dressing is not

It’s easy to get carried away and see manipulation in every portfolio change, so a few cautions.

• Normal rebalancing happens at month-end too. Inflows, redemptions and index changes all force trades, and some of them will land near the disclosure date by coincidence.
• Selling a loser can be a sound decision. If a company’s story has broken, exiting is the right call whatever the calendar says. The question is whether the decision was about the business or about the snapshot.
• Index funds and ETFs have little room to do it. They are meant to track their index, so their holdings change when the index does.
• Debt funds are a different case. With fortnightly disclosure and yields published for each instrument, the window is narrower, though credit quality around period-ends is still worth watching. Our explainer on segregated portfolios in mutual funds shows what happens when a bond in the book goes bad.

Why this matters to an ordinary SIP investor

Most of us pick a fund on its returns, its category and maybe its riskometer label, and we stick with it through a long SIP. Window dressing isn’t a reason to panic about any of that. It is a reason to be careful about one specific shortcut: choosing or keeping a fund because its latest holdings list “looks good”.

A month-end portfolio tells you what a scheme owned at the close of one trading day. It doesn’t tell you what it owned on the 15th, how much it paid in trading costs to get there, or whether the manager will still hold those names next month. Rolling returns against the benchmark, consistency across market phases and turnover tell you far more about the person running your money.

The same habit of judging process over appearance runs through good trading too. Our guide to risk management in trading makes the case for measuring decisions by what they risk, not by how they look afterwards.

A short checklist before you read a fund’s holdings

• Download at least three consecutive monthly portfolio files, not just the latest one.
• Mark the stocks that appear only in the quarter-end file.
• Check whether the quarter’s new entries were mostly stocks that had already rallied.
• Compare the scheme’s turnover with peers in the same category.
• Put more weight on rolling returns against the benchmark than on the names in the top ten.

A tidy shop window is nice to look at. What you’re buying, though, is everything in the store, and the bill for rearranging the display gets added to your NAV either way.

Disclaimer: This article is for education only and is not investment advice. The fund, stocks and figures in the worked example are hypothetical and used only to explain the idea. Mutual fund investments are subject to market risks; read all scheme-related documents carefully and consider consulting a SEBI-registered adviser before making investment decisions.