Has it ever happened to you that your mutual fund scheme returned 20% but you only made 10% out of it? Ideally, investors should get the same return as the fund, minus the costs. But often that’s not the case. An investor’s behaviour plays a key role here. Let’s look at how investor behaviour can spoil the returns, and ways to avoid the pitfalls.
Problem of averages
We tend to get drawn by the average number that we kind of expect to be the norm. We forget the path that the fund had taken, its highs and lows, and just focus on the average.
Three funds that give a compounded annualized growth return of 15% in the same time period of 5 years, could take very different trajectories (see graphic). We have assumed Scheme A is least volatile, scheme B is more volatile and scheme C is the most volatile of the three. More importantly, none of the schemes gave 15% return in any year.
