Returns made by average MF investor lag those of schemes and SIPs: study

Frequent churn, timing the market eats into gains

Returns made by the average mutual fund (MF) investor are lower than those of scheme or systematic investment plans (SIP). This is true for three broad categories–equity, debt and schemes that invest in both (hybrid)

A study conducted by Axis Mutual Fund shows average annualised return made by an equity MF investor was 13.2 per cent between 2003 and 2020. On the other hand, equity SIPs and funds delivered returns of 14.5 per cent and 18.7 per cent respectively.

Focus on short term returns, timing the market, impulsive investing techniques and frequent churning of the portfolio are the factors that tend to eat into the gains.

“As we have seen repeatedly over multiple market cycles, sharp falls in the market have large effect on investor flows and the same was witnessed in 2020 as well – especially for equity funds,” Axis MF said in a note.

“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.”
 

Market players said many investors took money off the table quite early last year thinking that the rally was “too good to be true.”

From its covid-19 lows on March 23, 2020, the Sensex doubled within 11 months.

Inflows through SIPs in 2019-20 stood at Rs 1 lakh crore. For the first 11 months of FY21, SIP flows have stood at Rs 86,898 crore. Since July last year, equity funds have continued to see net outflows of over Rs 46,800 crore

This signals that instead of increasing allocations, SIP investors scaled back their investments.  

Investors returns in hybrid funds has been 9.3 per cent, compared to 12.2 per cent of fund returns between 2003 and 2020. In debt funds the investors returns are 7.7 per cent as against funds returns of 7.8 per cent between 2009 and 2020.

So what should be the strategy that investors should adopt?

“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 or strategies that can deliver over the long term rather than following risky short term market fads,” says Axis MF.