If you are among those puzzled as to why mutual fund returns do not match the returns of an individual investor, you are not alone. Scores of investors like you often wonder why their fund investments have not grown at the same clip as advertised by the fund in its factsheet or in a media article. Most of the gap can be explained by their investing behaviour. Many investors react to the market noise and start actively managing their MF investments. A misstep here and a wrong move there, could deviate returns.
To quantify the effects of investors’ frequent churning, the Axis MF analysed their behaviour for equity and hybrid funds over the past two decades (2003-2022) and debt funds over the last 14 years (2009-2022). Apart from calculating the point-to-point investor and fund returns, the study looked at the yield delivered through systematic investments (such as SIPs).
Investor returns represent the consolidated yield realized by adjusting their inflows/outflows into the category. The computation is done using an IRR approach after calculating net sales into each category.
The SIP returns are calculated based on an assumption of equal investments quarterly over the tenure of the study.
The analysis used regular growth plan schemes for all funds. All analysis was done using monthly assets under management and return data.
Who is to blame?
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. For instance, the investor returns in equity funds at 13.8 per cent was 530 basis points (1 basis point is equal to 0.01 per cent point) lower than fund returns and 140 basis points lower than SIP returns.
It is evident that the excessive and frequent churning dents investor returns. Often during the market turmoil, the recent being the correction from Oct 2021 to June 2022 or the sharp downside seen in February-March 2020, many investors stopped long-term SIPs responding to the volatility. This defeats the very purpose of SIP, causing sustained harm to the portfolio as investors do not benefit from compounding.
Llook at the chart below that summarises the findings for equity and hybrid funds (over 2003-2022) and debt funds (around 2009-2022).
Cost of herd mentality
Retail investors typically enter the market after a big jump in indices reading and exit on a big fall. This is amply reflected even in sales of mutual fund schemes.
To understand this, one can see how gross equity sales (mutual funds) has followed the trajectory that the benchmark index Nifty 50 has laid out from December 2020 to June 2022. This is not new and depicts the earlier trend (see the image below).
When the Nifty 50 index crossed 15,500 levels in June 2021, the gross equity sales picked up at a furious pace and almost doubled in a few months as markets galloped rapidly. Thereafter, from October 2021, it trended down with gross fund sales remaining stagnant for a while and then started moving in fits and starts. It again reached the peak level around March 2022 before falling steadily.
This erratic investment behaviour is one of the prime reasons for lower r returns than the fund yield. Investors need to stay invested through the complete market cycle rather than chasing a trend during a particular period can be a solution. SIPs are a good tool to help mitigate the issue of timing the market through regular and equalised allocations over time.