Investor returns lower than fund returns: Axis MF study

  • According to the study which looked at regular plans of mutual funds, equity funds delivered a CAGR of 18.8% but investor returns were just 12.5% over this period
  • With respect to debt funds, the gap was narrower at 7.8% for the funds and 7.4% for investors

Neil Borate
First Published17 Dec 2019
Since the return of MFs is reported after deducting expense ratio, the answer to this divergence isn’t as simple the expense ratio of the fund
Since the return of MFs is reported after deducting expense ratio, the answer to this divergence isn’t as simple the expense ratio of the fund(Photo: iStock)

An Axis Mutual Fund study spanning a period of 16 years from 2003 to 2019 showed investor returns coming out lower than corresponding fund returns across the industry.

According to the study which looked at regular plans of mutual funds, equity funds delivered a compound annual growth rate (CAGR) of 18.8% but investor returns were just 12.5% over this period. The AMC also looked at hybrid funds and found fund returns of 13.2% compared to investor returns of just 9.3%.

With respect to debt funds, the gap was narrower at 7.8% for the funds and 7.4% for investors. The AMC obtained investor data by looking at net sales into each fund.

Since the return of mutual funds is reported after deducting expense ratio, the answer to this divergence isn’t as simple the expense ratio of the fund. Instead, the gap is a result of human behaviour. The AMC ascribed three reasons to this ‘fund vs investor’ gap. First, it noted that investors overreact to market sentiment and chase the latest performer. Second, they focus on short term performance and lose out on long term gains. Third, they don’t invest early enough. As a result they see lower returns and that too quite late. "Investor flows have tended to be volatile and have followed market returns. Unfortunately this has diluted the returns they have enjoyed from the market," said Ashwin Patni, fund manager and head of products at Axis AMC.

The AMC also looked at returns over a short time period of 5 years ending in September 2019. Here it found that investor return in equity funds whether through lump sum (5.8%) or SIP (6.4%) were lower than the fund return for the corresponding period (8.2%). The case was similar for hybrid funds with investors getting 6.4% and 7.1% in lump sum and SIP compared to a fund return of 7.6%. In debt, the gap was a little lower at 7.7% (lump sum) and 7.9% (SIP) compared to a fund return of 8.1%. “Investors enter and exit for various reasons and this can change their actual return compared to the fund’s return. It could be sentiments or even someone needing the money for their expenses. It is understood by them that their returns could be different from that of the fund,” said Bhavik Dand, a Mumbai based independent financial advisor.

The gap on the equity side in particular is yawning. Six percentage points over 16 years translates to a gap of 2.5 times.

Investor behavior is crucial when it comes to investments. A lot of biases can be mitigated by looking at financial goals and asset allocation.

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