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Who makes more money , the fund or investors in the fund ?

Posted By: Admin

This question seems a bit like an oxy moron, the fund is nothing but a contribution of all the investors. So it seems logical that the returns generated by the fund Is the same returns enjoyed by the investors as well. Is that true ? 

Recently a  fund celebrated its 20th anniversary and during the course of its history of  20 years, it had managed to generate a compounded Annual Growth rate of 20% per annum for its unit holders. However the sad part of the tale as revealed by the fund was that less than 4% of the investors  had stayed invested during the entire tenure of the fund. In fact a single digit of holders held the fund for a period longer than 7 years… an overwhelming majority of almost 50 % of the holders invested for a period less than 5 years.

Why does this happen ? 

  1. Investors constantly churn the portfolios looking for the  best performing funds and in  periods of underperformance move out chasing better performing ones.. 
  2. Investors believe that they must book profits constantly as equity markets are fickle and profits today could be a loss tomorrow. Hence the desire to keep booking profits and churning the portfolio ;
  3. Many investors are speculative and look at short term returns, than long term ones. 

So if an investor had invested Rs 1.00 Lakh in the new fund offer of the above fund and waited till date, the value of his investment today is Rs 38.33 Lakhs and if he had done an SIP of Rs 1000/ monthly the portfolio today would be Rs 31.09 Lakhs ( Rs 2.40L invested). 

While these are mind boggling returns, who are these really smart people, I am referring to the 4 % who have stayed invested through the tenure of the fund. I don’t know but I can guarantee you that a majority of them would be dead investors ( unclaimed investments) , or people who forgot or changed addresses and missed updating their information , so really people who were unaware of their investments. 

So the way to best long term returns seem to be is to play dead, ie not react constantly but forget that you have any investment at all. Now that’s something worth thinking about. 

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