Factsheet Returns vs Portfolio Returns: Why the Difference?

The mutual fund industry in India has seen unprecedented growth, with Assets Under Management (AUM) surging from Rs 23.8 lakh crore in 2019 to Rs 75.4 lakh crore in July 25. Despite this remarkable expansion and impressive factsheet returns displayed by various schemes, a troubling reality persists – investors consistently earn significantly lower returns than what their own investments generate. This phenomenon, known as the ‘behaviour gap’, is one of the most critical yet overlooked aspects of mutual fund investing in India.

The behaviour gap refers to the difference between a mutual fund's reported time-weighted returns and the actual rupee-weighted returns earned by investors. According to Morningstar's comprehensive study on Indian mutual funds, this gap is substantial and persistent across all time horizons.

As per the 10-year data, the gap widens to a massive -5.8 per cent per year, meaning investors lost out on approximately 45 per cent of the returns their funds generated over the long term. Why has this consistently happened? The Root Cause – Behavioural Biases Over Market Fundamentals.

While traditional financial theory assumes rational investors who make decisions based on risk-adjusted returns and long-term fundamentals, extensive research on Indian investors reveals that behavioural factors significantly outweigh rational analysis in deciding actual investment outcomes, with Loss Aversion acting as the Primary Culprit. This psychological tendency causes investors to feel the pain of losses approximately 2.5 times more intensely than equivalent gains. In practical terms, this manifests as –

  1.  Holding losing investments too long, hoping they will recover.
  2.  Selling winning investments prematurely to 'book profits'.
  3.  Avoiding equity funds during market downturns when valuations are attractive.

Research shows investors flock around the best performers of the last year, with 40 per cent of all mutual fund sales occurring in top-performing funds, while bottom-quartile performers see only 15 per cent of sales activity. This pattern, also known as Recency Bias, also called Chasing Yesterday's Winners, directly contradicts the fundamental investment principle of 'buy low, sell high'. In FY25, sectoral and thematic funds received the highest inflows at Rs 1.47 lakh crore, due to their stellar past performance. A telling example is the technology sector funds, which experienced massive inflows during 2021-22 following exceptional returns in 2020-21. Subsequently, these funds delivered significantly lower returns, leaving late entrants with substantial notional losses.

Let us consider Sarthak, a 34-year-old IT professional from Pune, who had always heard that mutual funds were the smart way to build wealth. By the end of 2017, inspired by the ‘Mutual Funds Sahi Hai’ campaign and buoyed by stories of fantastic returns, he started investing – first with enthusiasm, then with rising expectations. He religiously studied monthly factsheets, tracking charts and numbers, imagining his future corpus.

Through bull and bear markets, Sarthak’s funds displayed annualised returns – 13 per cent over 5 years for one leading equity scheme. The factsheet was clear. But his portfolio told another story – actual IRR was just 9.6 per cent. Where had the missing 3.4 per cent gone? Hadn’t he picked the right schemes and followed all the advice?

In early 2020, as markets tumbled during the pandemic, he panicked. With media flooded with predictions of doom and despite knowing ‘long-term mindset’ wisdom, he stopped his SIPs and redeemed part of his largest fund at a loss. When markets rebounded sharply in late 2020, FOMO (fear of missing out) gripped him. He poured money into the then trending thematic funds – just as those sectors were peaking. The funds had dazzling recent returns in the factsheets. The reality? By 2023, some of these investments had barely broken even, some were even in the red. When one of his funds languished below his purchase NAV for two years, he hesitated to exit – he did not want to ‘book a loss’. He held on, hoping for a miraculous recovery, rather than admitting he had chased performance and entered at the wrong time.

What Sarthak experienced was not unique. Morningstar’s research shows the average Indian investor earned 2-6 per cent less annually than the funds they invested in – due entirely to poorly-timed entries and exits, emotional trading, and the traps of recency and herd behaviour. Finally, he decided to change. He began a SIP in a diversified Flexicap fund, ignored short-term headlines, and made a financial plan linked to his actual goals. Each month, he invested – rain or shine – watching market swings without reacting to every noise. Over the past three years, his real portfolio returns began to look closer to those factsheet numbers.

The previously mentioned investor’s journey is the story of millions of Indian investors. Factsheets do not guarantee personal success; the biggest determinant is behaviour. The funds themselves are capable – but it is discipline, self-awareness, and an ability to mute the noise that bridge the gap between potential and actual returns. Also, your risk-taking ability matters the most. This is where Asset Allocation and Systematic Investments help.

The biggest and the most underrated advantage of SIPs is behavioural modification through process. It not only reduces timing risk through rupee cost averaging, but regular investing reduces the emotional impact of market volatility. In a year when foreign investors have relentlessly sold domestic equities, the average SIP inflow every month has reached approximately Rs 25,000 crore.

But the ultimate paradox is: can we bridge this behavioural gap? YES!

  1.  Embrace discipline and consistently invest regardless of market conditions.
  2.  Evaluate performance over multiple time periods rather than point-to-point returns.
  3.  Avoid frequent changes.

Addressing the behaviour gap through enhanced investor education, structural reforms, and behavioural finance-based solutions will be crucial and help in transforming the impressive growth in AUM into actual wealth creation for billions of Indian investors by ensuring that investors capture the wealth creation potential that mutual funds offer. Remember – factsheet is the map; but only an investor who watches their steps, avoids emotional shortcuts, and walks steadily ends up reaching their wealth destination.

Disclaimer: The opinions expressed above are of the author and may not reflect the views of DSIJ.