Stock market investors tend to show optimism as the markets go up. Conventional market wisdom espouses a buy low and sell high approach. The pessimism among investors in the wake of an otherwise insipid returns from the markets in the past few years triggered outflows from mutual fund investments in 2012, in which the Sensex posted 24 per cent gains.
To understand the impact of why investors lose money in equity funds, we conducted an exercise by treating all historical inflows and outflows in equity funds. We then calculated the overall annual return or XIRR. In the past 13 years, based on the inflow-outflow data available with AMFI, the markets through bull and bear phases witnessed Rs 1 lakh crore net inflow in equity funds. About 40 per cent of the Rs 1 lakh crore came in 2006. However, investors being emotionally driven exited the markets during both bull and bear phases to either book their gains during the bull run, or to cut their losses during the bear phase.
According to our analysis, had investors stayed invested with regular monthly investments, similar to an SIP, they would have earned 17 per cent annualised returns over the past 13 years instead of 11 per cent, when they invested and redeemed based on market movements.
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