Although mutual funds are seen as wealth creation tools, many investors lack the patience to stay with them for the long-term.
That’s one of the big reasons why the returns you get in your hand are far less than the amount shown in your fund’s fact sheet, experts say.
A recent note by Axis Mutual Fund says investor returns were significantly worse than both point-to-point fund returns as well as returns delivered by systematic investment plans (SIPs) For the study, it looked at equity, hybrid and debt funds.
Axis MF studied mutual fund returns over the past 20 years until March 31, 2022. Actively-managed equity funds gave 19.1 percent returns, it found. Investors earned only 13.8 percent. Hybrid funds returned 12.5 percent, but investors earned around 7.4 percent.
Investors in SIPs weren’t much better off. Investors in equity SIPs earned 15.2 percent and those in hybrid funds earned 10.1 percent. SIPs are more popular among small, individual investors.
To compute these numbers, the fund house has considered regular growth plan schemes’ returns and monthly assets under management for all open-ended schemes.
The study accounted for a schemes’ assets under management on a month-to-month basis. The study also considered inflows and outflows, a clear indication of investors moving in and out, to calculate investor returns.
The fund house says that it has seen a similar underperformance for 5-year and 10-year time periods as well.
Investor behaviour was seen as the main reason why they earned smaller returns. A few investors discontinue their SIPs when markets fall and a few may want to sell all their investments, seeking to protect their capital.
“Many investors tend to over-react to short term information. When the markets crash and the portfolio is painted in red, they seek flight to safety and redeem their investments,” says Vijai Mantri, chief mentor and co-founder of Jeevantika, a firm specialising in lost and unclaimed investments.
“Savvy investors take advantage of this. ‘Seeking Comfort with the investments’ is a costly mistake most investors make,” Mantri added.
What he means is that investors have to learn to live with volatility. When past returns look good, many investors want to commit their money, but they are keen to exit when the situation takes a turn for the worse.
It should be the other way round. Investors’ behavior based on greed and fear tend to pull down the returns they earn.
Ravi Kumar TV, founder of Bengaluru-based Gaining Ground Investment Services, says that many investors are too focused on selecting investments that can offer the best returns, but rarely remain invested in an asset class through market cycles.
“Even if you are invested in a scheme with an average performance for a long period of time, you would see a significant amount of wealth creation. Chasing past winners many times makes investors land in trouble,” he says.
Investing in high risk assets such as equities just because past returns look good can be painful, especially for first-time investors. Investments initiated in line with a well-designed financial plan that aim to achieve a financial goal should be continued irrespective of market movements.
Stay with your SIPs
“Failure to continue with your SIPs in equity funds in difficult times will pull down your overall returns. SIPs are aimed at benefitting from rupee cost averaging. If you sell in bad times, you are denying yourself this benefit,” says Parul Maheshwari, a Mumbai-based Certified Financial Planner.
She also recommends investing in improved versions of SIPs offered by fund houses to benefit from low valuations at times of distress in the stock markets.
“In addition to your existing SIP, you can also consider deploying spare cash when the markets are reeling under selling pressure, provided you are prepared to hold on to your investments for a minimum five years,” she adds.
This is easier said than done, but investors have to attempt to bring more discipline to their investments. They can also tap investment advisors or mutual fund distributors if they find it difficult to make an investment decision in times when the markets send out mixed cues.