Given the state of volatile markets we revisit the pitfalls of chasing returns and the "behaviour gap". In the Journal of Banking and Finance, 2007 paper titled
Mutual fund flows and investor returns: An empirical examination of fund investor timing ability authos Friesen and Sapp look at this question — does timing the buying and selling on equity fund improve investor returns?
They look at 7,125 mutual funds in the US over a 13-year period and calculate two measures of returns. They find that while an average fund manager produced 0.62 percent of monthly return in the sample, the average investor could only capture 0.49 percent of monthly return. Market timing thus cost the average investor -1.56 percent annually in lost returns compared to a simple buy and hold strategy.
They conclude: Over 1991–2004, equity fund investor timing decisions reduce fund investor average returns by 1.56 percent annually. Underperformance due to poor timing is greater in load funds and funds with relatively large risk-adjusted returns.
The culprit is our tendency to chase returns. We buy a fund after it has delivered good returns and sell after it delivers bad returns, precisely the behaviour we should avoid. This is what leads to a behaviour gap in our returns.
The total assets under management (AUM) of the mutual fund industry stood at Rs 24.5 lakh crore as on September 30, down from Rs 25.4 lakh crore in August. Mutual funds saw net outflows of Rs 1.51 lakh crore in September, led by outflows from liquid, money market and ultra-short duration funds. The SIP book stayed strong at Rs 8,262 crore in September, a Rs 32 crore increased from Rs 8,230 crore in August. Reliance Nippon Life Asset Management (RNAM) has been renamed to Nippon India Mutual Fund, following the acquisition by Japan’s Nippon Life Insurance. The names of existing schemes have been changed accordingly. The company has announced that it will continue to run its operations without any change in structure. Sundeep Sikka will continue to be the CEO of the company with its existing management team. Bank of Baroda has entered into an agreement with BNP Paribas Asset Management Asia to merge their mutual funds business, subject to regulatory approvals. The average assets under management for the Baroda AMC stood at Rs 11,320 crore and BNP Paribas AMC was Rs 10,073 crore, as of March 31, 2019. The Competition Commission of India has approved the acquisition of Essel Mutual Fund by BAC Acquisitions Pvt Ltd. In a statement, the CCI stated that it has given approval for the acquisition under the 'green channel' route. BAC is a private company founded by Sachin Bansal. The acquisition is subject to approval from the Securities and Exchange Board of India (Sebi). Movers and shakers
1. Anand Shah, deputy chief executive officer and head-investments at BNP Paribas Mutual Fund, has resigned from the fund house. Further, Chockalingam Narayanan has been re-designated as head of equities with effect from October 5, 2019.
2. Sundaram Mutual Fund has announced that Arjun G Nagarajan has been appointed as chief economist and communications manager and designated as a key personnel of the company, with immediate effect.3. Aditya Birla Sun Life Mutual Fund has announced the appointment of Gopalaraman Padmanabhan as an independent director on the board of Aditya Birla Sun Life Trustee Private Limited, with effect from October 7, 2019.
Quote of the week:Li Lu: In my view, the biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. Not only is the mere drop in stock prices not risk, but it is an opportunity. Where else do you look for cheap stocks? Gaurav Rastogi is the CEO of Kuvera.in — India’s first completely free direct mutual fund investing platform.