Work the math on bettering your investment returns

I have never made money in mutual funds as compared to gold or real estate. This is a common concern we hear amongst those around us. Digging deep, most of the time, the low returns are due to the investor’s behaviour. As Morningstar India’s ‘Mind the Gap’ India report - a study of fund returns versus investor returns across time frames, asset classes and categories - shows, investors earned about 2.7 per cent, 2.5 per cent, and 5.8 per cent less than the total returns the funds generated over three, five and 10 years, respectively. Timing the market, buying (or selling) on the basis of recent performance, chasing after a fad, or just deciding to leave the market when it’s temporarily down are some of the reasons for this gap, according to the report.

Apart from the above, there are other behavioural traits which may lead to a bad experience for investors. Complicating the portfolio is the most common issue. We often find investors having 8-10 funds in different categories and tracking of these funds becomes difficult. Especially since each of these funds may be from different sub-categories and require a different approach to managing them. For example, thematic and sector funds are tactical allocations and need to be monitored regularly to exit at the right time.

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Of course, while risks and costs impact investment returns investors love trying out exotic investments. But such investments come with complex taxation and/or risk. Those who invested in cryptocurrencies are still grappling with the right tax disclosures. Investors in stock baskets, only realised post investing the high costs involved and that they could have exited at sub-optimal returns.

Checking the portfolio daily or in short intervals is another characteristic that could lead to adverse returns. The odds of taking hasty decisions increase with all the noise in the markets.

Newer Investors tend to equate luck with investing skill. Luck can lead to some short-term returns but in the long term, knowledge and certain skills along with an investment strategy that aligns with personal financial goals and risk tolerance is what determines investment success. Hence, just repeating some lucky investments may not work all the time. For instance, individuals tend to invest more in stocks or funds that have had great recent performance. But this performance may not repeat in the future.

An absence of change in portfolio with change in life situation impacts investment success. Indian investors have less than 5 per cent of their portfolio in equities. With the growing inflation in education, changes in financial goals and changing lifestyle spending, a portfolio invested in traditional investments, yielding less than inflation returns on a post-tax basis is not going to work. Education inflation is more than 10 per cent per annum and to save enough for this goal, individuals would need to make a change in their portfolio - from child plans to equities.

Investing success is all about choosing simple investments, which beat inflation, and having the ability to stick to them.