Investor returns significantly worse than point-to-point and SIP investments: Findings

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April 2, 2021 10:35 AM

Stopping long term SIPs due to a short term market correction essentially defeats the utility of the SIP and is precisely the behaviour that causes long term harm to the portfolio.

Mutual Funds, SIP returns, MF investors, equity, systematic regular investmentsAcross categories and time periods, investor returns are significantly worse than both point to point fund returns as well as SIP returns.

When we look at the return of a mutual fund scheme, it may not be the same for all investors. The returns in a mutual fund scheme may vary across different investors. The actual return to an investor could be significantly different than point-to-point and SIP returns. One’s investing behaviour plays a big role in the actual returns realized. Typically, investors focus too much on short term or recent performance, over-react to the market sentiment and do not stick to an asset allocation pattern in their journey towards wealth creation.

These and some other findings are a part of the study conducted by Axis Mutual Fund. In its third edition of the study on the difference between aggregate returns generated by Mutual funds against those enjoyed by MF investors, the fund house makes an attempt to quantify the effects of Indian investors’ buy-sell decisions on their long term performance.

Axis Mutual Fund carried out this research on 3 different category of funds – equity, hybrid (or multi-asset) and debt funds – using data between 2003-2020 for equity and hybrid funds and between 2009-2020 for debt funds.

The findings from the recent study are aligned with those of earlier years that investor flows are not stable but instead tend to follow market performance and as a result, their realized returns are much worse than what they would have achieved by using either simple buy and hold or systematic investment strategies. This effect is persistent across different time periods.

This study quantifies the impact of volatility in investor flows or frequent churn across schemes and clearly brings out the significant damage that this is causing investors – Investor returns are consistently lower than fund returns across time periods and categories. Investors need to stay disciplined and focused on the long term while making allocations in order to get the best outcomes from their investments.

Some of the typical examples of behaviour that cause damage to long term returns include:

  • Overreacting to the market sentiment – the greed and fear cycle
  • Focusing too much on short term market/ fund performance
  • Not following asset allocation
  • Investing in a knee-jerk rather than systematic manner

2020 and the Impact of Covid

From being strongly positive, investor flows into equity went negative in the second half of 2020 as the impact of the market correction played out. Even more damagingly, we saw a large drop in the industry SIP book as those investors whose SIPs matured did not renew them, or many others chose to cancel ongoing SIPs. Stopping long term SIPs due to a short term market correction essentially defeats the utility of the SIP and is precisely the behaviour that causes long term harm to the portfolios as investors miss out on the long term compounding power of equities on account of excessive focus on short term market movements.

Net new SIPs (in lacs) v/s Nifty

(Source: Amfi, NSE, Axis AMC analysis; Net new SIPs are calculated as the difference between the number of new SIPs registered and number of SIPs discontinued/ tenure completed)

Findings – Fund returns v/s Investor returns

The fund house analyzed investor behaviour in equity and hybrid funds for the period of last 18 years (2003 – 2020) and debt funds over the period of last 12 years (2009 to 2020). Apart from calculating point to point investor and fund returns, the returns through systematic regular investments (such as SIPs) were also looked at.

It is notable that SIPs remove the issues of market timing from the investor through regular equal value allocations over time. The other significant advantage of systematic programmes of course is that they are quite well suited for investors that have regular cash flows as they take away the operational challenges of investing every month/quarter.

The findings of the study are quite comprehensive and give us a sense of the damage being suffered by investors. Across categories and time periods, investor returns are significantly worse than both point to point fund returns as well as SIP returns.

The chart below summarizes the findings:

Comparison of Fund returns, SIP returns and investor returns

(Equity/ hybrid funds data pertain to the period 2003-2020; debt funds data pertains to 2009-2020. Source: Axis AMC Research. Past performance may or may not sustain in future. The above study is to explain investment habits and is not investment advice)

What should investors do?

Axis Mutual Fund in its report states that as they have assessed the damage that frequent churn is causing to investors, the logical question is what steps should investors take to protect themselves? The answers are surprisingly simple:

  • Start early and invest regularly to get the full benefit of compounding
  • Have a clearly defined asset allocation plan and monitor it regularly
  • Do not get swayed by market noise in the short term – especially when the market is going through a correction. These things are part and parcel of the equity markets.
  • Invest in funds/ strategies that can deliver over the long term rather than following risky short term market fads.

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