Mutual Funds Generated 2.7% More Than Investors’ Returns On 3-Year Horizon, Says Morningstar

Investors earned about 2.7-5.8 per cent less than the returns generated by mutual funds over three-, five-, and ten-year horizons, a new study by Morningstar , an investment research firm, has revealed.

Investors earned about 7.8 per cent, 6.3 per cent, and 6.5 per cent per year on the average rupee they invested in mutual funds across various fund categories in the last three, five, and 10 years, respectively, as of June 30, 2022. This was almost 2.7 per cent, 2.5 per cent, and 5.8 per cent less than the total returns generated by the funds over the same duration, i.e., three, five, and 10 years, respectively.

 

The gap in the returns generated by mutual funds and investors can be attributed to ill-timed purchases and sales of funds, which cost investors nearly a quarter to a half of the return they would have otherwise earned if they had simply invested and held on to the funds.

The investor return gap differs by asset class and fund category, although it exists in all circumstances. The ongoing disparity between the returns investors actually experience and the reported total returns makes cash flow timing, along with investment costs and tax efficiency, one of the most important elements that can determine an investor’s ultimate outcomes.

Investment Across Asset Classes Lagged, Except For Commodities

When it comes to investments across asset classes, the returns experienced by investors lag behind the stated total returns for all asset classes across the three-, five-, and 10-year periods, with the exception of commodities. Commodities were the only category of assets to produce a positive investor gap during a 10-year period, indicating that investor returns outperformed fund returns during that time period.

Fixed Income Assets Had Minimum Gap

While the gap was negative for all underlying category groups across three- and five-year periods, the results varies significantly. The fixed-income category fared the best, with the lowest investor gap of 1.5 per cent per year over three years, and 1.6 per cent per year over five years.

 

Surprisingly, during a 10-year period, this difference widened to 2.7 per cent each year. While the return gap was the best across asset classes, given that this asset class provided single-digit returns, the investor gap was large enough to assure that investor returns for this asset class were the lowest across all time periods.

How Can Retail Investors Bridge This Gap

Investors can improve their investment’s performance by maintaining a limited number of well diversified funds, automating tedious tasks, such as rebalancing, avoiding narrower or more volatile funds, and embracing approaches that automate investing, such as rupee-cost averaging, or creating a systematic investment plan (SIP), which automatically invests a certain amount every month on a fixed date.

Diversified Asset Allocation

Asset managers have launched an increasing number of highly specialised products, as the mutual fund business evolved over time. Most investors, though, would be best served by keeping things simple and sticking to the simple and broadly diversified funds. Broader core offers, such as large- and flexi-cap equities, have performed much better than narrower ones, such as sectoral and thematic funds.

Avoid Volatile Funds

Avoiding volatile funds can be a smart move for the risk-averse investor. Gauging the volatility of a fund is one of the crucial parameters one should consider whether one invests in lump sum or through SIPs. One should always look at the fund’s portfolio and gauge individual stocks with the highest weightage.

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