Investors returns vs. mutual fund returns

The obvious reason is – investor behavior where-in investors get influenced by short-term market movements and take suboptimal decisions which have an adverse impact on their returns.

In the last 20 years, actively-managed equity funds gave 19.1% returns whereas investors earned only 13.%. Hybrid funds returned 12.5%, but investors earned around 7.4% only. In both cases, the difference is more than 5% p.a.

Here are five key findings of the study:

• Investor returns are worse than fund returns;
• Over shorter periods and especially during times of high volatility, SIPs tend to do better;
• Between buy & hold (lumpsum) and SIP, it is seen that over the long term as compounding kicks in, buy & hold (lumpsum) performs better;
• This effect is persistent across different time periods and shows that there has been little change in investor behavior over the last 20 years;
• The findings conclude that investor flows are not stable but instead tend to follow market performance and as a result, their realized returns are much worse than what they would have achieved by using either simple buy and hold or systematic investment strategies.

What should investors therefore do?

• Investors should not get bothered by short-term market movements and instead focus on their goals and make appropriate investment decisions by consulting their financial advisors;
• Investors should, on a regular basis, invest their savings. Systematic Investment Plans or SIPs are quite well suited for investors that have regular cash flows as they take away the operational challenges of investing every month/quarter;
• Investors need to stay disciplined and focused on the long term while making allocations in order to get the best outcomes from their investments;
• The evolved set of investors should embrace STP (Systematic Transfer Plan) & SWP (Systematic Withdrawal Plan), in addition to SIPs

Conclusion: To earn bigger returns, investors have to bring more discipline to the way they invest.