During this period, when the equity funds delivered a compounded annualized growth rate of 18.8%, investor returns were just 12.5%. Similarly, hybrid fund returned 13.2% as compared to investor returns of 9.3%. The gap was narrower in case of debt funds with returns of 7.8% for funds and 7.4% for investors.

The results were similar when Axis Mutual Fund conducted the study for a shorter investment horizon of 5 years ending September 2019. For this, the AMC considered investment through systematic investment plans (SIPs) as well.

Table: Investors earn lower than funds

	Investor returns	SIP returns	Fund returns
Equity	3.58%	6.40%	8.20%
Hybrid	6.40%	7.10%	7.60%
Debt	7.70%	7.90%	8.10%

Returns are for 5 years ending September 2019

​The gap in returns can be clearly attributed to investor behavior wherein investors get influenced by short term market movement and take actions which can cause implications on long term gains.

Investors earned lowest in equity funds because equity markets are more volatile. So instead of holding on to investment, investors tend to time the market without realising what they could have achieved by being patient.

The returns are better through the SIP mode as it allows investors to stagger their investment systematically and in a disciplined manner.

[Read: Are Your SIPs Giving Negative Returns? Here's What To Do...]

The latest AMFI data also reveals a similar picture. Despite being an asset class suitable for long term investment, only 35% of equity assets have a holding period of more than 2 years. However, there is an improvement from the previous year when 28% of industry's equity assets remained invested for more than two years.

Graph: Holding trends in equity assets;

Data as on September 30, 2019
(Source: AMFI)

Whenever a fund does not perform well, investors prematurely exit the scheme. On the other hand, they continue to chase top performers across categories to add to their portfolio without assessing its place in the personalised asset allocation plan.

It is a common belief among many investors that by moving in and out of funds based on market movement they can maximise the returns. But in reality it harms your returns leading to a gap between what investors earn and what the fund earns.

Investors must remember that volatility is the very nature of market. The sharp market movements are usually due to a knee-jerk reaction to short term events that do not necessarily matter over the long term. Thus, over time the markets revert to their fundamental valuations. As we can see in the chart below, the Sensex has more than doubled in the last 10 years.

[Read: Want To Multiply Your Portfolio Returns In A Volatile Market? Read This!]

Graph Sensex grew exponentially in the last decade

Data as on December 19, 2019
(Source: ACE MF)

Investors who stay invested for the long term, benefit from compounding of wealth and earn higher returns. Therefore, it will be in the best interest of your financial health if you remain calm during short-term fluctuations in the market and focus on your set investment goal.

Opt for the SIP route to conveniently, automatically invest a small amount regularly. By doing this, you will be able to grow your wealth in the long term and achieve your goals at lower risk.

Further, to avoid frequent churning of your mutual fund portfolio, invest in worthy schemes suitable to your investment objective, risk profile, and investment horizon. It would not be wise to depend on your friends, relatives, or star ratings of mutual funds to select the best mutual fund schemes. Moreover, do not rely heavily on the past performance of the fund because it is not indicative of future growth.

[Read: The Special Care to Select the Best Mutual Funds in 2020]

Choose schemes that are managed by experienced and competent fund managers and belong to fund houses that have well-defined investment systems and processes in place. Each fund should have performed consistently well across market phases and cycles in comparison to their respective benchmark and category peers and rewarded investors with superior risk-adjusted returns.

Diversification of investment is crucial to ensure that your portfolio is not exposed to very high risk. A very high equity exposure is not suitable for all types of investors as they are prone to higher volatility. Such investors can diversify their portfolio across other asset classes such as debt and gold.

When should one exit mutual fund scheme:

• You have achieved your desired corpus for a financial goal.

• The scheme underperforms consistently.

• The fund objective changes.

• The fund risk profile changes.

• In case of a financial emergency.

Having said that, it is important to not just invest and forget about it. One must conduct a periodic review of their portfolio to determine if it is on the right path to achieving goals. It will help you to determine if there is a need to replace your existing scheme with a better alternative.

The current market scenario is a great time to invest in equity through some well-managed and worthy mutual fund schemes.

Editor's Note: If you wish to select worthy mutual fund schemes, I recommend you to subscribe to PersonalFN's unbiased premium research service, FundSelect.

PersonalFN's mutual fund recommendations tend to beat the market by a significant margin over long time periods. FundSelect has beaten the market by over 70% in a decade.

Each fund recommended under FundSelect goes through our stringent process, where they are tested on both quantitative as well as qualitative parameters.

Every month, PersonalFN's FundSelect service will provide you with insightful and practical guidance on equity mutual funds and debt schemes - the ones to Buy, Hold, or Sell.

If you are serious about investing in a rewarding mutual fund scheme, Subscribe now!

Add Comments