The behaviour gap

A friend forwarded me a factsheet last night. Twenty years, 19.1 percent a year. His message under it: how can I go wrong.

Honest answer: the same way almost everyone in that fund went wrong. By being human about the timing.

There is a twenty year study of Indian equity funds (2003 to 2022) that put two numbers side by side. The funds' own NAV return: 19.1 percent a year. The return earned by the actual rupees investors put in and pulled out: 13.8. Same funds. Same two decades. A 5.3 point annual gap that went to nobody. No fee collected it, no taxman took it. Investors bought after the hot years, paused after the falls, and burned it.

On Rs 10L over those twenty years, that is Rs 3.30 cr versus Rs 1.33 cr. The most expensive thing most investors ever buy is their own timing, and it never shows up on a statement.

The mechanism is simple once you see whose return the factsheet even is. A CAGR times one rupee invested on day one and never touched. Real money arrives late. I built a toy fund to show a friend: five years of +50, +35, -25, +12, +14 is 14.2 percent a year. Put Rs 1L in at the start and Rs 4L after the two hot years, the way money actually shows up, and your rupees earn 4.3 percent inside a 14.2 percent fund. Morningstar measures this gap globally every year and finds investors leave roughly 15 percent of fund returns on the table. This is not an Indian quirk. It is a human one.

The quiet hero of the Indian study: SIP investors earned 15.2. Not because a SIP forecasts anything. Because a calendar cannot panic and cannot chase.

You do not earn a fund's return by picking it. You earn it by staying boringly invested in it