How to make money in the investment world? You may feel picking best stocks or mutual funds is just about it. But it is only a stepping stone. The real magic lies in having a rational mindset that can distil logic in noise. Even astute investors fail just because they lose sanity when things go awry. It is all the truer for retail investors who easily fall prey to market noise.
Data shows while mutual fund schemes may show stupendous return in the long-term, retail investors don’t make similar returns. Why? You have to stay in the game to win or lose. Most retail investors go off the field.
Data from Morningstar India shows investors earn about 2-6 per cent less than what a mutual fund scheme returns. According to its study on fund returns versus investor returns, investors earned about 7.8 per cent, 6.3 per cent and 6.5 per cent per year on the average rupee they invested in mutual funds across fund categories over the last three, five, and 10 years, respectively, ended June 30, 2022. This is about 2.7 per cent, 2.5 per cent and 5.8 per cent less than total returns the funds generated over three, five, and 10 years, respectively.
“This shortfall, or gap, stems from inopportunely timed purchases and sales of funds, which cost investors nearly one quarter to half the return they would have earned if they had simply bought and held funds,” says Morningstar in its report titled ‘Mind the Gap – India’.
Mutual Fund house Axis Mutual Fund did a similar study for its schemes. The study says, among equity funds, if the funds have returned over 19 per cent over the last 20 years, between 2003 and 2022, investors gained only 13.8 per cent during the same period. Among hybrid funds, the schemes generated 12.5 per cent while investor gained only 7.4 per cent. The fund house also looked at returns delivered through systematic investments (such as SIPs). It stood at 15.2 per cent and 10 per cent, respectively for equity funds and hybrid funds, respectively.
“The findings of our study indicate that investor returns were significantly worse than both point-to-point fund returns as well as systematic investment returns for all the three categories i.e., equity, hybrid and debt funds,” Axis Mutual Fund says in its report.
“It is clear that excessive and frequent churning dents investor returns (in line with our findings from earlier years). Further, stopping long-term SIPs in response to short-term market corrections defeats the very purpose of SIP, causing lasting harm to the portfolio as investors do not benefit from compounding,” the fund house adds.
The Morningstar report has another interesting insight. The conservative category experienced the smallest investor return gap both over a three-year and five-year period. The highest investor return gap was witnessed by the multi-asset category and aggressive category for the three-year and five-year period respectively.
It means the more volatile the returns are in a scheme, the higher will be the churn or exit resulting into losses for investors. Investors find it hard keeping calm seeing their portfolios in losses. They may blame external factors causing harm to their portfolios, but it is their own overreaction to market downfall.
Investors would do well staying away from the greed and fear cycle focussing too much on short-term returns. If one has a long-term view, the short-term corrections shouldn’t bother one. In fact, investing more in the correction ensures even better returns.
“Don’t get swayed by market noise in the short term. Avoid impulsive investing, rather, invest in a systematic manner to make the most of compounding and rupee cost averaging,” suggests Axis MF.