Why do your returns rarely match what funds deliver?

The research examined 170 diversified equity mutual funds over a decade, comparing their published returns with what real investors earned based on their actual cash flows. The findings were sobering, to say the least. While funds delivered healthy returns through consistent systematic investment plans (SIPs), the average investor significantly underperformed their investments.

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This phenomenon isn’t new nor surprising to those who study investor behaviour. But the magnitude of the gap – ranging from 1% to a staggering 10% in some cases – should give us all pause. A 3% annual gap, which may seem modest at first glance, compounds a loss of over ₹4 lakh over a decade on a modest ₹10,000 monthly SIP. That money should be in your pocket, not evaporated away because of poor decisions.

The enemy within

The biggest culprit in this wealth destruction is our tendency to exit investments prematurely. About 40% of investors abandon their funds in just two years – hardly enough time for a proper investment strategy to yield results. 

The main issue is recency bias – our tendency to overweight recent events and extrapolate them indefinitely into the future. When markets climb, we become increasingly optimistic; when they fall, we become increasingly pessimistic. The result? We chase yesterday’s winners, pouring money into funds after they’ve posted spectacular returns, usually just in time for them to revert to the mean.

Herd mentality compounds this problem. There’s deep comfort in moving with the crowd, whether in fashion, food or finance. But in investing, the crowd is often spectacularly wrong. Google search trends show peaks in searches for “mutual funds” precisely when markets are cresting – a great indicator of investors’ tendency to arrive late to the party. This isn’t investing – it’s performance-chasing with a lag.

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This behaviour creates a destructive cycle. Investors wait until a fund has posted impressive returns, then pile in. When the inevitable correction comes, they panic and flee, usually at the worst possible moment. The result is buying high and selling low – precisely the opposite of successful investing. There’s an even more insidious cost to this behaviour.

When investors exit during downturns, fund managers are forced to sell holdings to meet redemptions, potentially at unfavourable prices. This harms not just the departing investors but those who continue with the fund. It’s a form of financial self-harm that ripples through the entire investment community.

Less is more

What makes this particularly frustrating is that the solution is so simple: do less. Far less. In fact, the ideal investment activity level after setting up a thoughtful portfolio is very nearly zero. 

Consider this insight from a veteran of India’s mutual fund industry: in any given year, about a third of stocks perform exceptionally well, another third perform poorly, and the rest fall somewhere in the middle. This pattern holds true across markets, including our own. The challenge isn’t finding winners – there are plenty. The real challenge is avoiding losers and then simply staying put.

Our research supports this. ‘Invest for the long term’ isn’t just a platitude – it’s a mathematical necessity. Five years should be considered the minimum holding period, not an ambitious target. Staying invested through market cycles isn’t just good advice, it’s the only way to capture the full return potential of your investments. 

Set and forget

Automating your investments through SIPs is the most powerful defence against your worst impulses. It enforces the discipline of buying more units when markets fall and fewer when they rise – the very opposite of what emotional investors typically do.

And while diversification is important, you don’t need a dozen funds scattered across categories. Four or five carefully selected funds can provide all the diversification a retail investor needs. Finally, rebalance annually, not emotionally.

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Success in investing doesn’t require predicting the future or identifying the next tech giant. It requires understanding what you’re investing in and having the discipline to stick with it through the inevitable ups and downs of market cycles.

Keep it simple

Simplicity isn’t just helpful in investing – it’s absolutely necessary. If you don’t fully understand an investment product, you have no way of determining whether it’s suitable, regardless of how well it’s marketed.

The news cycle and social media have only made this more challenging by creating ever-faster feedback loops that pressure investors to react to short-term events. But nothing happening on television or X tonight is likely to have a meaningful impact on your long-term financial success.

The research is unequivocal: your fund isn’t the problem. You are. But recognising this uncomfortable truth is the first step toward becoming the rare investor who actually captures the returns that markets offer. And in investing, as in so many areas of life, less action often yields more satisfying results.

Dhirendra Kumar is the founder and CEO of Value Research, an independent investment research firm.