Underperforming your investments?

Way back in 2002,Kothari Pioneer mutual fund was acquired by Franklin Templeton. Pioneer Blue chip mutual fund which was their flagship fund became Franklin Templeton Blue Chip fund. Since the inception of the fund in 1993 till its takeover in 2002,the CAGR on the fund was 9.56 per cent. Post takeover by Franklin between the period 2002 to 2012,the CAGR of the fund has been 26.4 per cent. Again in 2003,we saw Zurich Mutual Fund being acquired by HDFC Mutual fund. Their flagship funds were Zurich India Top 200 and Zurich India Equity fund. Similar to the above,post take over both the funds created larger Alphas (fund returns over benchmark) as compared to before takeover. Almost similar was Top 200’s performance. Alliance Mutual fund was acquired by Birla in 2005. BSL Equity and BSL Frontline equity are both top performing funds till date.

We were pouring over some data last week on the performance of Reliance funds. Reliance equity fund,one of the oldest in their stable,has since inception given returns of 27 per cent CAGR. From 1995 to 2012,in spite of the slew of scams in the late 90s,the IT boom and meltdown in early 2000s,the worst ever market falls since the World War II in 2008 which seems not to have ended yet,the investments have returned an impressive Twenty Sevent Percent Compounded Annual Growth Rate. But how many investors can boast of having actually realised these returns?

I am reminded of the awesome logic given by one of the leading investment advisor in the US,in one of his beautiful programs – on what an investor makes as compared to what the investments themselves make. This research report from Dalbar.inc,which studies investor returns,had this startling revelation to make. In the last 20 years,in the US,the average returns of all equity diversified funds where dividends were reinvested was close to 10.7 per cent. Meaning somebody who had invested 20 years back and had stayed invested through the period would have got a compounded annual return of 10.7 per cent. A R 100 invested would have now become a good R 6200.

In the same period,last 20 years,what did the average equity mutual fund investor who invested in the average equity mutual fund in the same option make? You would be surprised to know that – he made just 3.7 per cent. Meaning he started off with R 100 and the value of that investment today is about R 2800. That is it.

These are data pertaining to the US. It will be interesting to see how the Indian investor has fared in comparison to his own investments. Our gut feeling says that the picture wouldn’t be very different. The average investor would have enjoyed less than 35 – 40 per cent of the actual returns made by the investments.

All this jumping in and out of markets and reacting to news like the Fidelity takeover by L&T amongst the many others,is booting out over 2/3rd of your returns. To an investor all this is a bit overwhelming. An average mutual fund investor hasn’t made any money from his mutual funds in the last 2.5 years. He is sitting on the fence wondering which way to jump. He doubts his wisdom on choosing mutual funds in the first place and doubly doubts his agent who doesn’t seem to show up often lately. And now he is being told to exit a fund that he trusted and is not being told where to go. He would choose to jump out of the market back to the safety of his fixed deposits and post office investments,never to return again.

Investor behavior is the single largest determinant of returns and bad behavior results in,what you saw above 65 percent lesser returns. As long as your asset allocation is in place,you review and rebalance your investments periodically; you are not forced to sell your investments,when something bad happ- ens your financial fortune is assured. A financial plan would help you do just that,protect what you have,plan for what you need and take the emotions out of investing.

—Author is CEO,Freedom Financial Planners