The majority of the investors buy when the market has already run up and is valued expensively. This often leads to disappointment when the market either goes down or sideways for years. If you avoid doing what others do and invest regularly in top fund schemes, you can easily make money from your mutual fund investments
Indian equity mutual funds have delivered excellent returns over the past 10 years or so. Their returns on a point-to-point basis may not have been great but investing in top funds through Systematic Investment Plans (SIPs) would have delivered good returns. And yet, over the last six months more than Rs10,000 crore has flowed out of equity mutual funds. Many are selling because they have made losses or meagre profits? It has been the same story in previous market cycles. Why do investors lose money in mutual funds? The main reason is that they put money into equity mutual fund schemes at the wrong time. In an interview with CNBC-TV18 on Friday, Prashant Jain, chief investment officer of HDFC Mutual Fund, said that “almost 80%-85% of the equity mutual fund inflows came in when the market was highly valuated at a price-to-earning (P/E) ratio of 17-18. This is one of the reasons investors tend to get disappointed when the market declines subsequently and it becomes frustrating for investors to hold on to their investments. So, when the market finally rises, after they have broken even or made some money, they pull out their investments. Therefore, we never see inflows at low P/Es and when the market begins to recover.”
Read about the outflows from mutual funds in November 2012 here.
Getting their timing wrong or going in and out of their investments is not limited to Indian investors. It is the same story in the US. One of the most widely cited studies on investor behaviour is a study by DALBAR, a research agency. DALBAR’s Quantitative Analysis of Investor Behaviour compares the investors’ returns against market returns. The most recent DALBAR study found that in the 20 calendar years ending in December 2011, the Standard & Poor's 500 Index had a 7.8% compound rate of return. In the same period, the average investor in US equity mutual funds earned just 3.5%. Even in the five-year period ending December 2011, mutual fund investors went in and out at the wrong times, resulting in inflows when the market declined and outflows when the market rose.
When it comes to systematic investing, the study showed that for the 20-year period the average equity investor earning $9,853 against a systematic investor’s earnings of $8,665, for a total investment of $10,000. This just the second time in history, since 1994 when the DALBAR study was first published, when the average equity investor outperformed the systematic equity investor. The average systematic fixed income investor overwhelmingly outperformed the average fixed income investor over the twenty-year period by earning over four times as much.
Buying when the market is rising and selling when it is down is true of every investor in every country and every period. Here is some information Thomas Gibson’s classic investment book titled “The Facts about Speculation”, published in 1923. Gibson found analysed around 4,000 accounts (a high number in those days) and states, “The most glaringly apparent cause of loss revealed by the investigation of these accounts was the almost universal habit of making purchases at high prices after a material rise had already occurred. This error is of a wholly psychological character” (emphasis ours). Fast forward almost 100 years later, it is exactly the same.
Gibson found out that majority of the investors bought right at the top of the cycle, with the average price of all purchases being within about 4 points of the extreme high. The price and value disconnect is so great that few investors pay attention to fundamentals and recognizing value and were solely focussed on price action. He found that 90% of the investors who relied on charts and other mechanical systems suffered losses. Investors usually bought on slight declines from high prices and sell on slight advances from low prices. This is a classic losing strategy.
Another folly, according to Gibson, is impatience. It is pertinent to note that humans are a fickle lot and overreact when markets crash (especially when it has been purchased right on the top). When the market is rising, everyone rushes in—investors, mutual funds, advisors and so on. Advisors erroneously tell investors to buy. Investors get carried away instead of thinking hard before putting bucket-loads of money into an investment.
The way to address this is to invest regularly, which is technically called SIP. While SIPs can sometimes lead to negative returns over a long period of time, over longer periods the number of periods of negative returns reduces (Read: SIP Smartly) Systematic investing also helps to navigate volatile markets and negate negative returns. Take a look at the returns over the past five years ended November 2012. Had you invested Rs20,000 in an index fund based on the Sensex in November 2007, your investment would be worth just Rs19,976 at the end of November 2012. The Sensex has moved nowhere from the start of November 2007 to November 2012. A quarterly systematic investment of Rs1,000 over this period would be worth Rs24,838, up 24.19%. Therefore one should not undermine the benefits of systematic investing and should continue even through the volatile market movements. However, according to the recent Computer Age Management Services (CAMS) data we have seen many investors exiting their SIP accounts before completion of the tenure. Net SIP registrations have been negative each month from April 2012 to September 2012.
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If one of looking for investment from a longterm point of view there are enogh good share scripts and for short term FD's is very good.
Also if one if knowledgable,MF is a waste of time as the real returnes start coming anly after 5 yrs in which time ,if you have put money in the right shhares chances are returns wl be much much more more.
invest in a MF again!
spare some time Mr. Kapur and see this link too http://moneylife.in/article/indian-retai...
Yet there's no denying the fact that those who can 'successfully' invest on their own have no reason to invest in MFs.
But, the Study done by ISB shows 90% of Indian investors lose money in the stock markets.
Did ISB study mention how many MF investors have lost their money?
The article indirectly makes a strong case for PPF as its returns over 20 years would have been far superior than the 7.8% compounded return quoted. In fact with tax rebate included the power of compounding over 20 yrs in PPF would have given better than most of the MFs. Mr Prashant Jain knows this very well.
The 20 years performance figures quoted by you are not correct.
Here is just but one proof … Rs.5000 invested in Franklin India Prima Fund on 28th Sept 1994 has grown to Rs.105125.12 on 26th October 2012
Similarly request you to kindly check for yourself the 10 year plus performance records of other diversified equity funds and you shall find on average they have given about 17% CAGR for that period – which is double than the rate of 7.8%
Why mislead people? What is the agenda sir?
This discussion started on the basis of the above article that has quoted the US figures. The point the author has made and I support that MFs do not give better returns than direct equity investments. Care is reqd in both cases to select.
It is a myth that MF gives better return with SIP over a long period . There are studies available that compare MF returns over 15 years in Indian Market. Most of them give 4 to 6 % annual returns. Only a handful of them give returns 26 - 30% which is again lower than the best equity returns- you gave two excellent examples yourself. The PPF gave 9% compounded return in1997-2012 and if you add 30% tac rebate on IT over this 15 yrs period you may understand the point I made.
Thanks for the valuable inputs that made me review my references. I have no dispute with you if you chose to go the MF way. I end this discussion here wishing you safe investing and good returns.
Iam happy when the markets fall as it gives me an opportunity to buy more.
They took false advantage of my lack of knowledge.The result.We have blacklisated the company and got more knowledgable and donot need MFunds now.We have got quite knowledgable in shares.No wonder MF's lose out as their agents are just looking for "bakras" to get their 10% commission and target.They care a damn about when not to buy.
Mf industry is rightly receding due t its pathetic agents called "weath management advisors"
Rgds
Suketu
But, most of the times the cause of such loses is the investor himself. As Benjamin Graham, the greatest investor who ever lived said “The investor’s chief problem – and even his worst enemy – is likely to be himself”.
If you have discipline and PATIENCE, it is really difficult to lose money in mutual funds. But, somehow, a large percentage of individual investors seem to have mastered this art of losing money in mutual funds.
To be a successful investor, one does not need high degree of intelligence or higher qualification – What is required is Temperament. It’s a matter of character and not intelligence.
The chief reason people lose is because they seek comfort in being part of the crowd, rather than in the ‘courage of conviction’ of doing the right thing, without being concerned about what the others are doing.