A recent LinkedIn post by CA Abhishek Walia sheds light on a significant issue that many investors face: the impact of behavior on investment returns. Consider the case of a salaried investor who diligently invested Rs 18,000 a month into mutual fund Systematic Investment Plans (SIPs) for four years. Despite putting in this effort, the investor discovered that his actual returns were lower than those offered by traditional fixed deposits.
Initially, the investor believed he was making sound decisions, as his funds exhibited a compound annual growth rate (CAGR) of 11%. However, upon calculating the portfolio’s Extended Internal Rate of Return (XIRR)—the true measure of his returns—it became evident that he was only achieving a meager 6%. This is notably less than the 7% interest rate provided by fixed deposits over the same period.
What Went Wrong?
The post reveals that the fundamental issue wasn’t with the mutual funds themselves but rather the investor’s behavior. The SIPs commenced in mid-2019 but were paused for 10 months during the COVID-19 pandemic before resuming in 2021. Throughout this time, the investor made several fund switches in pursuit of “top performers,” influenced by their rankings.
In mid-2022, the investor redeemed Rs 2.2 lakh during a market dip, citing a short-term need, and re-entered the same fund six months later. Such actions led to significant missed opportunities for compounding during market recoveries and resulted in purchasing units at inflated prices. While the fund maintained an 11% return for those who remained invested, the investor’s timing decisions diminished his portfolio return to just 6%.
The Takeaway
Walia emphasizes a crucial lesson for all investors: “Investors need to understand that our investment returns aren’t what the fund earns; they’re what you allow compounding to do.” He further cautions that even the most “perfect” fund cannot shield an investor from the consequences of poor timing, hasty changes, or emotionally-driven exits.
His advice is clear: stick to the fundamentals. Commit to an investment horizon of at least five to seven years, automate your investments, and resist the temptation to make decisions based on short-term market fluctuations. “Your wealth is built in the market’s time, not your timing,” Walia asserts.
This case serves as a powerful reminder of the importance of checking XIRR—the true measure of individual investment returns—rather than solely relying on overall fund performance. For many investors, the pursuit of returns or interruptions in SIPs can prove more costly than maintaining a steady investment course through times of market volatility.
