Investors earn less than funds across asset classes & time frames

The gap between returns of the investors and the funds over three- and five-year periods was the highest for the commodities asset class, and over a 10-year period, the highest for the equity asset class, a study called ‘Mind the Gap’ by Morningstar India said.

For the equity asset class, the returns gap was 320 basis points per year over a three-year period and 289 bps per year for a five-year period. Over a 10-year period, the gap was as high as 734 bps per year, consuming almost half of the returns the funds generated.

“The investor gap in the equity category is not surprising, considering this asset class is subject to more dramatic performance swings. Investors generally flock to this asset class after looking at the recent returns,” Kaustubh Belapurkar, director, manager research – India, Morningstar, said.

The fixed-income category fared the best with the narrowest investor gap of 155 bps per year for the three-year period and 161 bps per year for the five-year period. Over a 10-year period, this gap increased to 274 bps per year. While the return gap was the best among the asset classes, considering this asset class yielded single-digit returns, the investor gap was significant enough to ensure the investor returns were the lowest for this asset class across all time periods.

Within the equity category, the large-cap category had the narrowest investor return gap of 196 bps per year over a three-year period. The mid-cap category and small-cap category witnessed return gaps of 359 bps and 562 bps, respectively, per year over a three-year period. Over a five-year period, the returns gap stood at 217 bps per year in the mid-cap category compared with 247 bps for the large-cap category.

The technology and the global sectors have seen the highest investor gaps over a five-year period, just as in the three-year period. “Sector funds are particularly prone to performance-chasing, with investors often piling into popular sectors after a strong showing and then bailing out when they fall out of favour. Early this year, Sebi had restricted overseas investments by mutual funds, leading to many global funds not having inflows during that period, which, in turn, has also led to the gap being large,” said Belapurkar.

Among fixed income categories, investor return gap for the dynamic bond category was the worst at 286 bps per year over a three-year period and 288 bps per year for a five-year period.

The category has had significant net outflows since November 2021, totalling `6,139 crore as of June 2022. The medium- to long-duration category had the least investor return gap at 65 bps per year, over a three-year period.

“More broadly defined core offerings, within equities categories, such as large-cap and flexi-caps have done significantly better than narrower offerings, such as sector funds and thematic funds. Similarly for fixed-income categories, while overall investor return gaps are narrower than equities, we can see the same hold true where core categories such as short duration, have narrower gaps compared with more volatile categories such as dynamic bond or gilt funds,” Belapurkar added.

According to him, investors are often swayed into investing into the top-performing funds over the short term. This often results in a big gap in investor returns. “Funds go through cyclical periods of underperformance due to style headwinds. Investors often end up selling out of recently underperforming funds and buying into recent outperformers, only for the trend to reverse, resulting in large investor return gaps.

“While following a buy-and-hold approach will generally lead to the best results for investors who have enough assets available, rupee-cost averaging can be an excellent way to enforce investment discipline and avoid the perils of poorly timed cash flows,” Belapurkar said. FE