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What to do if your mutual fund scheme earns more return than your investment

, ET Bureau|
Updated: May 13, 2019, 10.07 AM IST
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Why is it that some investors earn less than their funds over the same time period?

Highlights

  • While equity funds clocked 20.7% annualised return in the 15-year period between 2003 and 2018, the fund investors generated just 14.9%.
  • For both lump sum and SIP investments and, even for shorter time periods, investor returns were much lower than fund returns.
Are the returns shown in your mutual fund account statement same as the returns delivered by your fund? It is quite likely that you might have earned less than your fund. Take, for instance, L&T India Value Fund. It has delivered a return of 21.1% over the past five years. An average investor in the same scheme, however, earned just 6.9%, according to an ET Wealth study.

Similarly, ICICI Pru Value Discovery Fund has generated 24.3% over the past 10 years while its investors earned just 13.1%. A recent study by Axis Mutual Fund found similar differences in fund and investor returns.

While equity funds clocked 20.7% annualised return in the 15-year period between 2003 and 2018, the fund investors generated just 14.9%. For both lump sum and SIP investments and, even for shorter time periods, investor returns were much lower than fund returns, the Axis study revealed.

Fund returns from lump sum investments much better than investor returns...
MF-returns-lumpsum

...But investors managed to beat the SIP returns of funds
MF-returns-sip-returns

Why is it that some investors earn less than their funds over the same time period? What mistakes are they making? Are you also making the same mistakes? Read on to find out how you can bridge the gap between your and your fund’s returns.

  • Behavioural impact
If your return has been falling behind your fund’s return, your investing behaviour is to blame, say experts. “Inability of investors to control their emotions of greed and fear during various market phases makes them enter and exit the market at the wrong times,” says Harsha Upadhyaya, Chief Investment Officer, Equity, Kotak Mahindra Mutual Fund.

Dhaval Kapadia, Director, Portfolio Specialist, Morningstar Investment Advisers India concurs: “There is a tendency to buy when markets are near the peak, when much of the uptick has played out. Most of the selling occurs when markets are almost bottoming out, which is actually a good time to get in as valuations are cheap.”

Investors lagged far behind these funds
Even when the fund has delivered healthy return, investors have struggled.
5-yr-investment-tenure

10-yr-investment-return
15-yr-investment-return

Both timing and holding periods ultimately decide each investor’s experience in the market. This is why the experience of investors in the same scheme can differ widely. One investor may have accumulated the units in a disciplined, staggered manner through SIP.

Another may have chosen to time the market and made lump sum investments at specific points in time. One investor may have stuck with the same fund for years, while another may have moved in and out of funds chasing higher returns.

  • Investment term and timing
Investors often do not participate in the fund’s growth in a linear fashion. They invest erratically—initiate SIP, let it run for a year or two, discontinue or redeem the SIP and then reinvest at some later date. But this habit tends to cut into their returns. This gap between fund and investor return can shrink considerably, if the investor’s holding period converges with that of the scheme, insist experts.

“However, when investing periodically or trying to time the market, this gap cannot be closed. Investment before a period of outperformance (or underperformance) shall lead the investor return to be higher (or lower) than the fund’s returns and vice-versa,” says Kapadia.

So, it may be best to avoid timing the market. “Staying put and thus not allowing room for investing biases to creep in is key to successful investing,” says Vidya Bala, Head, Mutual Fund Research, FundsIndia. Amol Joshi, Founder, PlanRupee Investment Services, cautions investors against second-guessing the market.

“Stay invested to the extent that your asset allocation allows and rebalance in case the asset mix gets skewed,” he says. This is not to suggest that timing the market may never pay off. A few savvy investors may manage to extract higher returns by investing when the market is down and booking profits when the market is up.

Why you must avoid timing the market
Investors have got their timing mostly wrong. They have poured money into equity funds when the market was expensive and redeemed when market was cheap.
timing-the-market

Our analysis shows that investors have managed to earn better returns compared to their fund’s returns from linear SIP investments. But this approach is not for everyone, as the markets tends to throw up surprises when you least expect them.

Umesh Mehta, Head, Research, Samco Securities, says, “In their attempt to time the market, most investors end up doing the reverse—buying high and selling low.” Ankur Maheshwari, CEO, Wealth Management, Equirus Capital, maintains that timing is, by and large, a futile exercise.

“The market works on multiple variables and it is impossible for anyone to predict the future correctly every time,” he says

  • Why greed is not good
In their bid to chase higher returns, investors tend to switch funds regularly, latching on to the latest charttoppers. This often leads to disasters. “Investors should dissociate from the historical fund returns and focus instead on their own investing approach,” says Raunak Onkar, Head, Research, PPFAS Mutual Fund.

Suppose you plan to accumulate Rs 25 lakh over the next 10 years. At an expected annualised return of 12%, you will have to put aside around Rs 11,200 per month in an equity fund to build this corpus. If your fund keeps delivering the required return, you should not be bothered if some other fund is generating a slightly higher return.

Investors should also avoid thematic investments or aggressive strategies. Bala reckons they should not pick fancy products to earn more. “You need to choose boring, steady performers. Stay the course and weed out those that may fall by the way side, occasionally,” she says. A simple asset allocation and rebalancing strategy should suffice for most.

For those not comfortable doing asset allocation on their own, dynamic asset allocation funds or balanced advantage funds can be an alternative. With their in-built rebalancing mechanism, these funds get people to buy at the bottom and book profits at the top and thus provide a better investment experience.

  • Do flexible SIPs work?
In recent years, investors have been pouring money into equity funds via SIPs. These inflows have been growing irrespective of market conditions. Even at record market highs, notwithstanding expensive valuations, people have been investing. While regular investing for the long term is a virtue, is there a better way to invest than putting investments on auto-pilot?

Some experts suggest that people who invest through SIPs may not necessarily benefit by committing to a fixed investment amount indefinitely. “Investors are putting in the same amount at all levels of the market. This amount should ideally vary depending on the extent of the rise or the fall in the market,” says Kunj Bansal, Partner and CIO, Acepro Advisors.

Today, mutual funds and investment platforms offer tools that enable timing the market. Options like ‘Flexi SIP’, ‘Smart SIP’, etc. allow investors to take decisions based on the prevailing market conditions. They help people determine when to begin their SIP, to continue or stop an existing SIP, and to skip investing or double the investment in a particular month. The argument is that by investing more or less at certain points in time, the investor can optimise the SIP and get the most out of market fluctuations.

However, some experts suggest investors not to tweak or play around with the simplicity of the SIP. “If you maintain the savings discipline, the ongoing market volatility should not concern you. Just make sure you commit to the regular investing habit based on your corpus requirements,” says Onkar.

Also, managing the variable SIP as opposed to a fixed SIP may not be easy for all. Such investors should stick with the traditional SIP. Investors may instead opt to supplement their SIP. “It is better to do a plain vanilla SIP and opt for a lump sum investment whenever the market is trending lower,” says Joshi.

Flexi SIPs won’t work in an expensive market
Over the past 10 years, the Nifty average monthly PE fell below 18 on just 16 occasions out of 120. So, had you initiated a flexi SIP 10 years ago with basic monthly investment of Rs 3,000 and raised it to Rs 6,000 whenever the index PE fell below 18, it would not have made a huge difference to your returns.
flexi-sips

  • Is passive investing better?
There are some who argue that people would do fine, if they just invest passively through an index fund. These funds charge much lower fee compared to actively managed funds. This helps them deliver returns in line with the market over time. But many experts are not convinced that passive investing is an optimal option.

“We have not reached a stage where just passive investing is enough. At present, a hybrid strategy is a must to beat the market. This can be done through smart index funds as large-cap substitutes, good multi-cap funds with clearly differentiated strategies, and well-managed mid- and small-cap funds,” says Bala.

Besides, passive investing will not help you stay abreast of market return, if you resort to timing. “There can be a gap in returns even in passively managed funds as investors try to time their entry or exit in such funds,” says Kapadia.

  • Beware of mind tricks
Finally, it is critical that investors realise the biases at play in their mind. These biases make us our own worst enemy by interfering with logical decision making. For instance, herding is a common investor trait that attracts investors to act according to the popular sentiment.

If there is a rush for mid-cap funds, you will also want to ride the mid-cap bandwagon. Similarly, recency bias, hindsight bias, confirmation bias, etc., inflict huge damage to investors’ portfolios. Being aware of these behavioural handicaps is half the battle won, say experts.
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