65% of Mutual Fund Investors Struggling to Beat Benchmarks, Dezerv Study Reveals

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Wealth Monitor app has revealed that 65% of investors are struggling to outperform basic market benchmarks with their mutual fund holdings. The portfolio review app, designed to compare an investor's portfolio’s returns against market benchmarks, revealed a lesser-known reality that might have a significant impact on how investors view their portfolio’s returns. The reality is that a majority of mutual fund investors are inadvertently leaving substantial money on the table by failing to beat the broader market indices.

The question arises about what's behind this underperformance afflicting mutual fund investors. Dezerv's analysis identified two critical factors contributing to the problem. First, many investors still fall victim to the flawed practice of chasing past performance when selecting funds - piling into investments that have generated solid returns in the past without considering whether those gains are sustainable in the future.

Second, and probably the quickest to fix, is that most investors use inaccurate or incomplete metrics to track their portfolio’s returns, such as simple absolute returns, instead of more robust metrics like extended internal rate of return (xIRR). Relying on overly simplistic or inappropriate metrics can paint an inaccurate picture of a fund's performance. Two commonly used measures are a fund's absolute return and compound annual growth rate (CAGR).

While easy to calculate, these metrics suffer from some flaws. Absolute return percentage measures an investment's gain or loss over a specific period. However, it fails to account for the timing of cash inflows and outflows.