Why do mutual fund investors earn lower than scheme returns?

Most investors invest on the basis of historical returns but, ironically, they actually make significantly lower than the scheme returns in which they invest. Investor returns were significantly worse than both point-to-point fund returns as well as systematic investment returns in equity, hybrid and debt funds categories, shows a study by Axis Mutual Fund.

While equity funds delivered a point-to-point 19.1% return, SIP (systematic investment plan) returns during the same period stood at 15.2%. However, investors earned lower returns at 13.8% during the same time period.

The mutual fund house conducted the investor behaviour study for equity and hybrid funds over the last 20 years (2003-2022) and debt funds over the last 14 years (2009-2022).

Similar trends were witnessed in hybrid funds and debt funds. While the fund returns in the hybrid category stood at 12.5%, SIP returns for the scheme were 10.1%, but investors could earn 7.4% only.

In the case of debt funds, the funds generated a 7% point-to-point return, SIP in these schemes generated similar returns, however, investors could earn lower returns of 6.6%.

Axis Mutual fund had similar findings for five years and 10-year periods as well.

The mutual fund house blames excessive and frequent churning for lower investor returns. Further, stopping long-term SIPs in response to short-term market corrections, says the study, defeats the very purpose of SIP, causing lasting harm to the portfolio as investors do not benefit from compounding.

"Gross equity sales have followed the trajectory that the benchmark index NIFTY 50 has laid out, which depicts a trend seen in the past as well. This is one of the prime reasons for investor returns being lower than the fund returns," says Axis Mutual Fund study.

What should investors do to earn better returns?

Investors need to stay invested through the complete market cycle rather than chasing a trend during a particular time period. SIPs help mitigate the issue of timing the market through regular, equalised allocations over time and are well-suited for investors who have regular cash flows as they can automatically invest every month or quarter with ease.

Investors need to stop some damaging investment habits, says the mutual fund house. “Overreacting to market sentiment dents the investor returns. Investors should avoid the greed and fear cycle. Also, too much focus on short-term returns should be avoided.”

Investors should also avoid impulsive investing. The best way to do that is to invest in a systematic manner. “Don’t get swayed by market noise in the short term. Stick to systematic investing even when the market is going through a correction. Investors must avoid following risky short-term market fads,” says Axis Mutual Fund.