The returns you never earned: Why investor behaviour destroys mutual fund gains and how disciplined SIPs could have made you richer

A recent high-profile report from a global consulting firm and a digital brokerage painted a rosy picture of India’s retail investing revolution. Mutual fund assets have grown sixfold, systematic investment plan (SIP) inflows have surged, holding periods have lengthened, and household penetration has doubled. The implicit message was clear: millions of Indians are building wealth through disciplined investing. There’s just one problem with this narrative: it confuses fund returns with investor returns, which are very different.

At Value Research, we’ve long suspected that the returns investors actually earn are substantially lower than those reported in fund performance tables. We finally decided to quantify this gap. Our team studied 10-year SIP returns across 170 diversified equity mutual funds and compared these to the returns investors actually earned, using cash-flow data to calculate the internal rate of return that mimicked real investor behaviour. The results should trouble anyone who cares about genuine wealth creation, rather than impressive-sounding industry statistics.

Examining investor behaviour

Across every equity fund category we examined, investors earned less than the funds’ stated SIP returns each year. Not marginally less, but meaningfully less. In value-oriented funds, the gap was 3.21% annually. In multicap funds, it was 2.75%. Even in large-cap funds, supposedly the most stable category, wherein investor behaviour should be the most rational, the gap was 1.56%. These annual differences compound into a lot of money over a decade. The 3.21% yearly gap in value funds translates to investors earning 2% less than that delivered by a simple, unchanging SIP. In multi-cap funds, the cumulative shortfall is over 21%. Even the best-behaved category, small-cap funds, with a gap of 1.49%, left nearly 12% on the table over 10 years.


What explains this persistent gap? The culprit is investor behaviour itself. People start SIPs when the markets are rising and headlines are exciting. They stop or reduce SIPs when the markets fall and fear takes over. They switch from the underperforming funds to recent outperformers, selling low and buying high with clockwork regularity. They add lump sums after a good year and redeem after a bad one. Each of these decisions feels rational at the given moment. Collectively, these are financially ruinous.

The irony is that SIPs were designed precisely to prevent this behaviour. The entire point of an SIP is to remove human judgement from the timing equation. Invest the same amount every month, regardless of whether the markets are at record highs or multi-year lows, and let rupee-cost averaging do its work.

However, investors can’t help themselves. They tinker with the one thing that was supposed to be untinkerable. They treat SIPs not as a commitment, but as a suggestion to be modified on the basis of market conditions, news flow, and their own emotional state.

Commitment is key

This has serious implications for how we should interpret the industry’s triumphant statistics. When reports celebrate the growth in SIP accounts or the rise in mutual fund AUM, they are measuring activity, not outcomes. When investors are saving more, but consistently sabotaging their own returns, it’s a problem. The industry earns fees on assets regardless of whether investors earn returns. This misalignment deserves more attention than it receives.

The solution is not complicated, though it is difficult. Investors need to treat their SIPs as genuinely non-negotiable commitments rather than flexible suggestions. They need to stop watching their portfolios frequently because every look creates an opportunity for destructive action. They need to internalise a deeply counter-intuitive truth—in investing, doing nothing is almost always better than doing something. Data suggests that the investors who simply started SIPs a decade ago and forgot about it, would be substantially richer today than those who actively managed their investments.

The robots, it turns out, were right all along. The problem is that we keep trying to prove we know better.

The author is CEO, Value Research