As per a report by Axis Mutual Fund, most mutual fund investors make lower returns than their mutual fund schemes due to their bad habit of frequently getting in and out of schemes.
The Axis Mutual Fund study covering a period of 15 years from 2004 to 2019 showed investor returns coming out lower than corresponding fund returns across the industry.
The report adds that the effect is consistent over different time periods and reveals that there has been little change in investors' behaviour over the last 16 years.
The study report ‘Analysis of Indian investor behaviour and its impact on performance’ by Axis Mutual Fund looked at the performances across different category of funds, including equity, hybrid and debt funds in the short and the long term.
The findings of the report conclude “investor flows are not stable but instead tend to follow market performance and as a result their realised returns are much worse than what they would have achieved by using either simple buy and hold or systematic investment strategies.”
The report analysed investor behaviour for the period of 15 years between 2004 and 2019 for equity and hybrid funds. For debt funds, it analysed the behaviour over a period of last 10 years.
According to the study, which looked at regular plans of mutual funds, equity funds delivered a CAGR of 18.8 percent but investor returns were just 12.5 percent over this period. With respect to debt funds, the gap was narrower at 7.8 percent for the funds and 7.4 percent for investors.
The chart below sums up the findings of the report over the long term for the periods mentioned above.
The report also looked at the returns for a shorter time period of five years ending September 2019. Here, the report also considered investments via SIPs or systematic investment plan apart from lumpsum investments.
The report revealed that investor return in equity funds whether through lump sum (5.8 percent) or SIP (6.4 percent) were lower than the fund return for the corresponding period (8.2 percent). The situation was similar for hybrid funds with investors getting 6.4 percent and 7.1 percent in lump sum and SIP compared to a fund return of 7.6 percent. In debt, the gap was a little lower at 7.7 percent (lump sum) and 7.9 percent (SIP) compared to a fund return of 8.1 percent.
The chart below shows the findings.
The report further brings out a few common mistakes made by investors.
The report attributed three reasons to this ‘fund vs investor’ gap. First, investors often overreact to market sentiment and pursue the latest performer. Second, investors focus on short-term performance and miss long-term gains. Third, they do not invest early enough and hence they see lower returns and that too fairly late.
Investor flows have tended to be volatile and have followed market returns. The report concludes that this has diluted the returns they have received from the market.
The report recommends that investors can take three simple measures to avoid committing these mistakes. It urges investors to stay disciplined, start early and focus on long-term fund performance instead of short-term volatility.
The report says “Invest regularly and on time, invest as early to aim for better returns and do not get swayed by the on-going market fluctuations to aim for healthy investment and better returns”.