Impact of investment behaviour on mutual fund returns: Investors kill their chances of making more money from mutual funds by following erratic investment behaviour. Chasing market trends is probably one of the biggest mistakes made by investors. An analysis by Axis Mutual Fund shows that frequent and excessive churning dents investor returns. It analysed investor behaviour for equity and hybrid funds over the last 20 years and debt funds over the last 14 years. In all three cases, fund returns were higher than investor returns and SIP returns.
In equity funds, the investor investors were just 13.8% in 20 years while the fund returns were 19.1%. SIP returns fared better at 15.2%. Similarly, in the case of hybrid funds, the investor returns in 20 years were just 7.4% while the fund returns were 12.5% and SIP returns were 10.1%. In debt funds also, fund returns were higher than the investor and SIP returns.
The higher fund returns compared to investor retunes and SIP returns in equity, debt and hybrid fund is indicative of the negative impact of trend-chasing by investors.
“The findings of our study indicate that investor returns were significantly worse than both point-to-point fund returns as well as systematic investment returns for all the three categories i.e., equity, hybrid and debt funds. We had similar findings for 5 years and 10-year periods as well,” the Axis AMC said.
“From the chart above, it is clear that excessive and frequent churning dents investor returns. Further, stopping long-term SIPs in response to short-term market corrections defeats the very purpose of SIP, causing lasting harm to the portfolio as investors do not benefit from compounding,” it added.
As per the analysis, getting out without completing the full market cycle is one of the basic reasons for investor returns lower than the fund returns. “A basic solution to this problem for investors is to stay invested through the complete market cycle rather than chasing a trend during a particular time period,” Axis MF said.
Investors should also not stop their SIPs in response to market corrections as they “help mitigate the issue of timing the market through regular, equalized allocations over time,” it said.
What to avoid
According to the Axis MF analysis, investors should avoid the following damaging habits:
- Overreacting to market sentiment. Avoid the greed and fear cycle
- Focusing too much on short-term returns.
- Chasing short-term performance for long-term gains
- Taking knee-jerk investment decisions
Disclaimer: Mutual Fund investments are subject to market risks. There is no guarantee that a fund can repeat its past performance in future. Please consult your financial advisor before making any investment decision)