ETMarkets Smart Talk: Too many funds, too many switches? The real cost of over-managing your portfolio, Kaustubh Belapurkar decodes

In the pursuit of higher returns, many investors fall into the trap of constantly tweaking their portfolios—adding new funds, exiting underperformers, or chasing the latest thematic trends.

But does this hyperactive approach to investing actually help? Or is it silently eroding long-term wealth?

In this edition of ETMarkets Smart Talk, we speak with Kaustubh Belapurkar, Director – Manager Research at Morningstar Investment Research India, who breaks down the behavioral pitfalls that lead to the infamous “return gap”—the difference between what mutual funds earn and what investors actually take home.

He explains why frequent fund switches, trend-chasing, and poor timing decisions can derail your financial goals, and offers practical tips to bring discipline and structure back into your investment journey.

Whether you’re a new investor or a seasoned one, these insights will make you rethink how often you really need to hit that “switch” button. Edited Excerpts –

Q) What factors contribute to the annual return gap between investor returns and reported total fund returns?
A) A return gap also known as behavior gap exists between fund returns and investors returns due to poorly timed entry and exit into funds by investors.

Only those investors that stay invested in the fund over the entire time period, earn the published fund returns, this is typically a smaller proportion of the overall fund assets.

Poor decisions such as switching funds too often, buying funds purely based on recent performance after they’ve already run up, and selling in a panic after market declines can all chip away at investor returns, creating a significant gap between fund returns and investor returns.More often than not investors flock to funds/sectors that have done well recently and exit funds that have done poorly.
These investing decisions based on historical returns can be counterproductive, since funds as well as sector/themes go through periods of performance rotation. Funds with narrow strategies tend to display much larger behavior gaps.
Q) How do these gaps impact investors’ end goals and how should one overcome these hurdles?
A) Behavior gaps result in investors earning much lower returns than the fund return, resulting in sub optimal returns in investor portfolios, and thus investors fail to meet their investment goals.

Investors can improve their results by holding a small number of widely diversified funds, automating mundane tasks like rebalancing, avoiding narrower or highly volatile funds, and embracing techniques that put investing on autopilot, such as SIPs.

Investors should avoid making too many switches in the portfolio by trying to chase recent winners.

Q) What psychological factors lead investors to make suboptimal timing decisions, and how can awareness of these biases improve investment outcomes?
A) Investor behavior is a very important factor while making investment decisions. Greed and fear are the two most common factors that lead to suboptimal outcomes in investment portfolios.

Behavioral biases such as herd mentality lead investors to invest in trendy funds or asset classes since everyone is investing in these funds, more often than not when these have already seen a significant run up.

Hot hand fallacy bias is the belief in excessive persistence of a trend, particularly if the trend is positive, this could result in excessive allocations.

For instance, when markets are bullish, investors tend to ignore asset allocation and potentially over allocate towards equities.

Q) Latest data suggests that despite a dip in equity mutual fund inflows in April 2025, the rise in AUM suggests strong market performance—what does this say about investor sentiment and market resilience?
A) Net equity fund flows continue to remain strong despite volatile markets which is a good sign that investors continue to invest in equities with a long-term perspective.

But looking at the granular flows across categories, you can see significant flows into sector/thematic flows over the last 12-18 months.

This trend is worrying, as sector/thematic funds are prone to significant timing risk, getting the entry/exit wrong can result in poor investment outcomes for investors.

Q) Sectoral/Thematic funds have seen notable inflows—what themes are driving investor interest, and how sustainable is this trend?
A) The last couple of years have seen significant flows in thematic funds. Over the last year Manufacturing, PSU funds received large inflows on the back of several new fund launches as well as stellar performance of the PSU stocks.

This is a trend typically observed in bull markets, where investors tend to look beyond diversified equity funds with misplaced return expectations. As with cyclical performance of sectors and themes, these flows also tend to be cyclical.

Q) With equity fund inflows declining slightly month-on-month, could this be an early sign of investor caution, or just a seasonal adjustment?

A) SIP flows continue to be the bedrock of monthly fund flows, which is a positive sign that investors continue to systematically invest in the market.

While lumpsum flows may vary depending upon the movements in the market, with market corrections leading to increased flows.

Q) Passive funds are on the rise! What factors contributed to the record ₹19,056 crore inflow into ETFs in April 2025?
A) While institutional investors still drive the majority of the ETF flows, passive funds have been gaining interest from individual investors in recent years.

As success rates for active strategies come down coupled with the advent of newer investors who are looking to access markets through passive funds have driven flows into ETFs and index funds.

Q) With ETFs now constituting approximately 13% of mutual fund AUMs, what does this indicate about the evolving investment landscape in India?
A) Passive funds have driven flows globally for the last decade, particularly in the US where passive assets overtook active assets in early 2024.

In India, passives have been gaining interest, with increasing individual investor interest as well as a flurry of new fund launches.

While active funds have seen success ratios come down, as the market expands, we think there is space for both active and passive funds’ assets to grow, with passive funds offering a low-cost alternative to investors who are looking to take market exposure.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)