Did you earn lower returns than what mutual funds delivered?
Though equity funds delivered good returns, investors got influenced by short-term market movements and took sub-optimal decisions that had an adverse impact on their returns.
By THE ECONOMIC TIMES | Updated:
Equity mutual funds churned out compounded returns of over 22% in the past 12 years, but the average mutual fund investor earned only 15.6%, according to a new study by Axis Mutual Fund.
Researchers at the fund house analysed investor behaviour between 2003 and 2015 and the effect of buy and sell decisions on their investment returns. They found that though equity funds delivered good returns, investors got influenced by short-term market movements and took sub-optimal decisions that had an adverse impact on their returns.
Investors in hybrid funds also earned less than the returns generated by the schemes, though the margin of difference between the fund and investor returns was narrower.
Investors earned less than funds Though equity funds delivered good returns, investors got influenced by short-term market movements and took sub-optimal decisions that had an adverse impact on their returns.
The Axis MF research findings reinforce an ET Wealth study which shows that regular investments earned higher returns than timing the market. An investor who continued his SIPs regardless of market movements earned more than one who successfully avoided the 10 biggest falls in the Sensex during the past five years.
Another research conducted in 2012 by the Hyderabad-based Indian School of Business found that stock investors in India tend to fall for behavioural biases and hence lose out. They sell winning stocks too quickly and hold on to losing ones far too long. They also get overconfident about their ability to pick stocks. The ISB researchers concluded that retail investors lost close to Rs 8,376 crore between January 2005 and June 2006 due to bad buy and sell decisions.
Klutzy as they are, Indian investors are not the only ones making mistakes in the stock market. According to Boston-based research house Dalbar, the S&P 500 index rose 13.69% in 2014, but the average equity fund investor in the US earned only 5.5%. Dalbar said behavioral biases that lead to poor investment decisions was the single largest contributor to underperformance over time.
Eight sins of stock investing Biases that lead to poor investment decisions
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Loss aversion: Fear of loss leads to withdrawal at worst possible time. Also called “panic selling”.
Narrow framing: Making decisions on part of portfolio without considering effect on the total.
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Anchoring: Remaining focused on previous events and not adapting to a changing market.
Mental accounting: Separating performance of investments to justify success and failure.
Lack of diversification: Believing a portfolio is diversified though it is, in fact, a pool of highly correlated assets.
Herding: Blindly doing what everyone else is doing. Often leads to buy high and sell low outcome.
Regret: Not performing a necessary action due to regret of failure in the past.
Optimism: Overly optimistic assumptions tend to lead to rather dramatic reversions when met with the reality.
