The gap between mutual fund returns and what investors actually earn
To see how this plays out in Indian equities, we analysed 18 flexi cap funds with over a decade of history. The findings show where investors should focus.Fund selection created enormous variance. The best performer delivered nearly 5% annual alpha over the benchmark.
The worst trailed by 4%. That means the better fund compounds with a 9% spread every year. When this gap compounds over more than a decade, investors in the better fund could end up with nearly three times more money as someone in the worst performing fund, starting with the same amount.But the data also showed something useful: 14 of the 18 funds beat the benchmark over the full period.
Only four did not. Picking well was less about identifying that one superstar, which is harder than it looks without hindsight, and more about avoiding the consistent laggards.The harder problem is what comes next. Even having picked well, periodic underperformance is the norm.We calculated the percentage of rolling one-year periods during which each fund trailed the benchmark.
The best-performing fund in our analysis spent a quarter of the decade underperforming. An investor tracking its performance would cringe once in every four periods. Other solid performers spent a third of their time trailing.On average, even the outperforming funds underperformed 40% of the time.
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