You may not be earning as much as your fund is

Have you invested in a fund that gave high returns, but your returns didn't match up to it? This is due to the difference between the investment return and investor return.

Investment returns are what you see in the marketing material of a fund house. Investor return is what you earn.

While there are many reasons behind it, the difference primarily comes from investors trying to time the market. Buying when the market is at an all-time high and selling when it falls is the most significant factor affecting investor returns.

The Axis Mutual Fund report 'Are investors creating enough wealth from their mutual fund investments' shows when investors get influenced by short-term market movements, it can lead to their returns underperforming the equity funds . The disparity can be as high as 6.5 per cent.

There's another reason: people don't invest in funds for long. As per the 'FolioandTicketSize' report by the Association of Mutual Funds of India (AMFI) in June 2023, only 51.4 per cent of investors have a more than two-year holding period. These figures prove why investing decisions based on short-term market fluctuations can harm investors.

How do investment returns vary based on investor behaviour?
We conducted an exercise to check the divergence between investment and investor returns. We selected the Parag Parikh Flexi Cap Fund owing to its high assets under management (AUM) and popularity among investors. Further, we assumed that an investor invested in the fund in 2019 and redeemed it in July 2023.

In addition, we segregated the data into three different categories:

• Case 1: In 2019, the investor invested Rs 5 lakh as a lumpsum. However, whenever there are outflows from the fund, the investor also redeems a part of their investment. The withdrawals depend on the size of the fund outflows (The greater the outflow size, the higher the amount of withdrawals). For instance, a high fund outflow of more than Rs 10,000 crore would mean that the investor is also withdrawing a large amount of their corpus, and vice-versa.
  
• Case 2: Systematic investment plans (SIPs) of Rs 5,000 on the 11th day of every month for the past five years. Yet, the investor redeems a part of their investment whenever there are fund outflows. Investors withdraw their money depending on the size of the outflows (The greater the outflow size, the higher the amount of withdrawals).
  
• Case 3: Total return of the fund for the last five years (calculated in CAGR terms).

Here's what we found:

Lumpsum investments with recurring withdrawals grew at a slower rate compared to a similar SIP.

Further, and more tellingly, the gap between fund and investor returns grew by as much as 3.6 per cent (in the case of lumpsum).

Moral of the story
Timing the market is futile .

Frequent withdrawals can significantly hurt the returns of an investor.

In short, staying invested during market fluctuations and not getting affected by short-term volatility is the recipe for success.

In addition, as you can see in the above table, the SIP returns are higher than its lumpsum counterpart. Here's why:

• SIPs offer a more disciplined approach to investing. Furthermore, investing a monthly amount instead of a lumpsum reduces the probability of making impulsive decisions.
  
• SIPs have the potential to provide better returns than a lumpsum, thanks to rupee-cost averaging. Rupee-cost averaging allows you to buy more when the markets are down and less when the markets are high. Buy low, sell high is the holy grail of all investors, after all.