Retail investors' returns lowest compared to fund houses during 2003-2022 despite market growing manifold: Report

The analysts advised investors to avoid overreacting to market sentiment, stop being greedy and focus too much on short-term returns.

One of the prime reasons for investor returns being lower than fund returns is that there was a much higher level of churn at the investors' end. Pic: Reuters

Even as markets have grown manifold during the past two decades and so have mutual funds, retail investors made the least compared to fund houses in all asset classes as they have been churning their portfolios too fast when markets turned choppy, according to a report.

According to an analysis of investor returns during the past two decades -- from 2003 to 2022 -- by Axis Mutual Fund, retail investors' returns were the lowest and those of fund houses the highest, be it in equity or hybrid funds (2003-22) and debt funds (2009-22).

And the Axis AMC analysts attribute this mainly to the frequent churn that investor portfolios faced when the market turns choppy.

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Between 2003 and 2022, when fund houses gained as much as 19.1 per cent from equity funds investments, investors, primarily retail, gained the lowest at 13.8 per cent, while systematic investment returns were higher at 15.2 per cent, the analysts said.

Similarly, investors' returns from hybrid funds were the lowest at 7.4 per cent, those from systematic investments were higher at 10.1 per cent and fund houses again gained the maximum at 12.5 per cent.

When it comes to debt funds, which have the lowest returns generally, investors just made about 6.6 per cent, while the other two made 7 per cent each during this period.

One of the prime reasons for investor returns being lower than fund returns is that there was a much higher level of churn at the investors' end, the report said and suggested that the basic solution to this problem is to stay invested through the complete market cycle rather than chasing a trend during a particular time period.

These outcomes are based on the analysis of the investor behaviour in frequent churning of their equity and hybrid funds on their long-term returns for the past 20 years -- 2003-22, and debt funds over the last 14 years -- 2009-22.

Apart from calculating point-to-point investor and fund returns, they also looked at returns delivered through systematic investments, such as systematic investment plans.

The analysis indicates that investor returns were significantly worse than both point-to-point fund returns and systematic investment returns for all three categories -- equity, hybrid and debt funds.

The study has similar findings for five-year and 10-year periods as well, which makes it clear that excessive and frequent churning dents investor returns.

Also, stopping long-term SIPs in response to short-term market corrections defeats the very purpose of SIPs, causing lasting harm to the portfolio as investors do not benefit from compounding, the report said, adding SIPs help mitigate the issue of timing the market through regular, equalised allocations over time and are well-suited for investors who have regular cash flows as they can automatically invest every month/quarter with ease.

The analysts advised investors to avoid overreacting to market sentiment, stop being greedy and focus too much on short-term returns. Also, investors should stop taking knee-jerk investment decisions and impulsive investing but invest in a systematic manner to make the most of compounding and rupee cost averaging.

Start early and invest regularly by which an investor stands to gain the full benefit of compounding, they added.

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