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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Dalbar & Performance gap

Posted by Muthu on February 21, 2015

You may know Peter Lynch, one of the best mutual fund managers who managed Fidelity Magellan Fund and produced an outstanding performance. He once said that more than 50% of the investors in his fund lost money despite the fund being an outstanding performer. Reason? Inflows were more after few good quarters and outflows were more after few bad quarters.

Boston based Dalbar releases a QAIB (Quantitative Analysis of Investor Behavior) report every year. Dalbar compares how much the investment gave versus how much the investors made. The difference is called performance gap. From 1984 to 2014, for a period of 30 years, the S&P 500 has given an annualised return of 11.11%. Whereas equity fund investors earned only average annual return of 3.69%. The performance gap is 7.42%.

Why performance gap? When a fund, after expenses, over a 10 year period, gives 18% returns, the investors also should have also made the same. But this rarely happens in a real life scenario. Investors invest more when the markets are high and redeem more when the markets are low. Added to that they keep chasing performance. A good fund is ditched because it had a bad year. A risky fund or not so good fund but which shows recent good performance gets lot of inflow. All these ensure that investors as a group earn less than what the funds provide. In many cases, people actually lose despite markets and funds doing well over a period.

Prashant Jain, one of the best fund managers in the country, in a recent interview has mentioned that only 2% of the AUM in HDFC Equity Fund is more than 10 years old. Since we do not know what percentage (it can be say 0.2% or 20%) of investors hold this 2%, for ease of understanding let me assume that 2% of the investors hold this 2% AUM. So the benefit of long term compounding and superior performance of HDFC Equity Fund is experienced only by 2% of its investors!

I also take this 2% as a representative sample for all equity funds of HDFC mutual fund.

One of their funds, an ELSS scheme, HDFC Tax Saver has given an annualized return of around 28% over last 19 years.

This means that the invested amount has multiplied by 101 times over last 19 years period.

Rs.1 lakh invested in 1996 would have been worth Rs 1.01 crores at the end of 2014.

All sounds good. But if you look at who benefited by these returns; it is only 2% of the investors.

As Dalbar studies has repeatedly pointed out, investor returns is much lesser than the investment returns.

This is because investors are not disciplined. They fear volatility. They do not have patience. They lack long term orientation.

In my last piece, I mentioned that you are one of 4% of the population who have been blessed with the ability to invest. Also you are one of the 1% who has understood the opportunities available and is investing in equity. Most important is you’re one of the rare 0.2% of the country, who has understood the power of investing regularly through SIPs.

Now you would have understood why only few get rich from stock markets or equity investing despite so much of good performance made available by quality stocks, good equity funds and even index itself.

The steps to get rich are easy. But self mastery is extremely difficult. Discipline, patience and long term orientation are the key to self mastery in investments.

As an advisor, I’ve taken it on myself to ensure that you practice this self mastery. I would always stand by you and support you toward this.

In my professional life, I’ve a big ambition. I want hundreds of families to make huge wealth through equity investing by practicing this self mastery. By huge wealth I mean, tens of crores in many cases and 100+ crores in at least few cases.

Already many of you have been doing SIP for last many years. You’ve started seeing the results. You would be amazed to see how much you would be worth in next 10 to 20 years, if you continue in this path.

Stay the course.

10 Responses to “Dalbar & Performance gap”

  1. Yatheendra said

    Wonderful Post . Very good Blog ……..

  2. DJ said

    Hi Muthu,

    I am slightly confused about what you said about HDFC Tax saver. You said 1 lakh invested in 96 would have returned 101 times the investment. I did a calculation based on the SIP returns, and a SIP would have returned only 26 times for the same period. From what I have read, lumpsum and SIP returns are similar over the very long term, say 20 years. Or am I missing something?

    • Muthu said

      SIP- you invest over a period. Lump sum- One time investment. Both are completely different.

      • DJ said

        Yes, I know. But for example if I invest the same 1 lac over a period using SIP, I am making only 26 times more as compared to a lumpsum which is giving me 101 times return. Do you see what I mean?

  3. bvmallikarjunrao said

    yes i agree as i am investing in SIP from last 4½ years it will be more as the years pass. is it necessary to increase the SIP amount each year with increase of salary. presently i am doing sip in 6 funds. i want to know min and max no. of funds which we ideally should invest via SIP.

  4. Girish Sidana said

    Where can I find the Prashant Jain interview mentioned by you? I am interested in understanding more about the holding periods in MF. Unfortunately, most data aat AMFI website is not structured well. What is a better source?

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