# Why your returns are not the same as the market’s return

In an investor-gathering addressed by a renowned fund manager, a presentation on the returns delivered by equities over several years was put up. One of the investors asked him, “you are showing these returns. I have been investing for over 5 years now but have not seen this return in my investment. So, are these really returns that an investor gets?”

This question rang a familiar bell as many of you have asked us variants of this question. Some of you also compare your holding’s returns with the fund’s return shown on any website and think you did not get the same returns for the same fund.

The answer to this question depends either on your investment behavior (predominantly) or how the comparison is made  – in terms of time frame and the product being compared. Let me try to list a few common reasons as to why you would not have got the same returns as the market.

If you are the kind prone to reacting to market volatility by investing money when the returns are high or taking away money when the markets fall or remove a large chunk and keep some, your returns are bound to be different.

This is irrespective of the fact that you are comparing for the same time frame whether 5 years or 7 years.

The question is about what you did in the in-between period. Please remember that the index is always fully invested. It does not move profits out like you do and then try to re-enter later. Hence, if you tried to do these ‘market timing experiments’ chances are that the index got the better of you.

### Wrong math

Even if you had beautifully booked out profits at a market peak and then reinvested in the same fund, what you see, unfortunately, is your return from the reinvestment date. It is not your returns over ‘full period’ of holding that fund. Let me explain with an example:

You invested Rs 5 lakh in Fund A say on January 1, 2011 and your value as of December 31, 2015 grows to Rs 12 lakh. Now you feel the market is at a high and want to exit and decide to withdraw the money that day. However, a month later, you see that the market has corrected quite a bit in January and decide to re-enter, investing the same Rs 12 lakh on January 31, 2016. As of October 2018, this value is at say Rs 14 lakh. So, between January 2016 and October 2018, your returns are shown as 5.7% and you wonder if your returns are quite bad. What you forget is the returns you totally made on this fund, from January 1, 2011. If you do a quick XIRR, you will see the ‘lifetime returns’ (returns over the entire period of holding that fund) to be 14.2%. So, first, your returns were not low and second, Rs 5 lakh was your cost, not Rs 12 lakh.

### Wrong time frame

Some of you also tend to be misguided by the 1-year returns of a fund and compare it with a different period of your holding, especially in years of very high 1-year returns. A single year return of 20% (absolute returns) when compared with your annualized (IRR) return of say 14% in the same fund, may seem quite different, if your time frame was, say, 2 years and a chunk of the returns came in the last 1 year. Annualised returns does not mean that the fund delivered the latest 1 year return in every one of your holding years. It may have been low in one year and high in another year.

### Mode of investing

Since most of the websites which provide fund returns, provide the point-to-point returns by default, you tend to compare those returns, with the returns of a SIP that you are running. These two cannot be compared simply because the timing of investments are very different. For example, the current 3-year returns of HDFC Mid-Cap Opportunities is 11.7% annualized on a point-to-point basis. If you look at the SIP IRR it is a mere 5.45%. Why is this so? This is because you’re considering only one single investment in the point-to-point returns. In the SIP, there are multiple investments made at different points; this gives several different investment periods and return. In finance-speak, the time value of money was across different periods in SIP but just one point to point period in lumpsum. So, compounding does not work alike for both.

Next, in the said SIP in the above period, you would have bought a good chunk when the fund rallied. Now with the fall, the SIP returns will seem worse simply because you averaged at a high and it is now low. If you had invested lumpsum, you did not invest when the fund rallied in 2016 and 2017, and so you did not increase your cost. Now that does not mean that SIP is bad. Consider a period when your lumpsum purchase was made at a high and the markets fell later. Then the SIP’s returns would beat out that of lumpsum’s. Hence, if you wish to compare, compare the SIP returns of the index or the peers over similar periods of your investment and not the point-to-point returns.

This holds good if you invested lumpsum and also kept investing now and then. Here again, comparing with point-to-point returns will not be correct.

If you have taken care of all the above errors and your fund still seems to pale in comparison with the rest in performance, then, of course, it is time for you to evaluate your choice of fund and consider the possibility that you may be holding a poor performer in your portfolio. At a portfolio level too, there could be various reasons when your comparison may not work. It could be as simple as your comparing an asset allocated portfolio with a pure equity index or as complex as one or two fund pulling down the entire returns. These are best addressed by checking with your advisor.

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