These days with too much of data available on variety of media, we have overdose of information available to jump into different decisions each time the data comes in front of us. One such data is past performance or Top performing funds.
I am sure many of us get tempted to take up this “THE hot buy idea” for future investments.
Are you one of those getting distracted with this information overload? If yes, you must give yourself next few minutes to read this article completely.
Do you know, past performance is neither an assurance nor an indicator of what future returns will be on your investments?
I was recently reading a research report by Dalbar, a Boston based financial services market research firm. Their 2016 research report “Quantitative Analysis of Investor’s Behaviour” about the impact of investor’s decision of buy, sell, switch-in or switch out of mutual funds on the returns they eventually earned has some very interesting observations.
The outcome of this study is very relevant for Indian Mutual fund investors.
The study says that as on 31st December 2014, 20 years returns in the United States for an average mutual fund investor was 5.19% p.a., while the same period S&P 500 Index and did not disturb on it for 20 years delivered 9.85%; a return difference of 4.66% p.a.
What does this mean? It meant that an average mutual fund investor would have got Rs. 31.20Lakh back by investing Rs. 10L in 20 years; while the same money would have become Rs. 65.94Lakh in S&P 500. A 4.66% return difference changes the end amount by more than 100%
This study further explains the most probable reasons of such an underperformance by Mutual Fund investors, which are as follows :
- Investor behaviour is not simply buying / selling at wrong times, it is the psychological trap, which triggers misconceptions that cause investors act irrationally.
- Due to this irrational behaviour, average investor has not stayed invested for a long enough time to reap benefits of power of compounding.
- No matter what the state of the stock / Mutual fund market, Investment results are dependent on investor behaviour than on fund performance. Mutual fund investors who held on to their investments for a long term, have been more successful than those who tried to time the market.
Just to give you a perspective on why it is important to stay long term with a particular fund, here is a factual example of an existing fund where 100,000/- invested in Oct’2006 has now become 508,000/- which is 37% p.a returns. I am sure, this scheme may not have been the top performer in all the years, which would have made many investors to exit from this scheme and entered into the next promising one. How many of us have such portfolio returns? Hardly very few would have seen such appreciation in their investments.
A giant tree is not created with planting new seeds every year, it gets created by watering and taking of care of same plant for many years. So is the case with wealth creation. Watering (Addding more money to same fund) and taking care ( Not chasing the hot ideas) will ensure the creation of giant wealth tree which will last for generations.
As an investor, choose your investments wisely as per your financial goals and risk capacity.
Focus on the time that you can stay invested. Don’t feel tempted to jump in and jump out. Regular monitoring along with your financial advisor will help you reach your financial goals.
STOP HOT BUYS & STAY INVESTED for BEST Outcomes.