You buy into a mutual fund or exchange-traded fund and expect to earn the same investment result. But invariably that doesn’t happen, and investors usually are the ones coming up short.
This lag in performance can be sizable, as researcher Morningstar discovered in its latest “Mind the Gap” study. If your stock fund earns 8% one year, for example, your own results might be closer to 6% or 7%.
How can you underperform the exact same fund that you own? Poor decisions explain a big part of it. Simply put, many people don’t just buy into a fund and then leave their money alone. Instead, they buy and sell along the way.
For the most part, “It boils down to the timing of purchases and sales into and out of funds,” said Jeffrey Ptak, Morningstar’s chief ratings officer.
In other words, poor timing decisions can easily chop one-fifth off of your return in a typical year.
Investors frequently buy or sell funds based on their reported total returns. These performance results for mutual and exchange-traded funds assume that a person has made a lump-sum investment on day one and held tight to the end, neither adding nor subtracting money. They also assume all dividends are reinvested, which might or might be the case for an investor in reality, and they assume management expenses and other costs have been deducted.
How much will I get after 10 years in mutual fund?
In Morningstar’s latest study, investors earned about 6% annually over the 10 years ending Dec. 31, 2022. The funds themselves generated an annualized average gain of 7.7%, including reinvested dividends and subtracting costs.
The lag of 1.7 percentage points is similar to gaps of 1.5% to 1.7% that Morningstar calculated in four previous studies spanning earlier 10-year periods.
“In my opinion, this is one of the most important studies Morningstar publishes, because it shows that what you see isn’t always what you get when it comes to fund returns,” said Amy Arnott, a portfolio strategist with the company.
Timing mistakes, along with investment expenses and taxes, are among the critical factors that can influence a person’s end results. And unlike actual gyrations in the stock and bond markets, they are something over which investors exert at least some control. (Regarding taxes, there are ways to minimize the bite, and with expenses, it is easy to find low-cost products.)
Returns for investors almost always will differ from a fund’s reported results unless a person makes no additions or subtractions during the entire holding period, Morningstar said. The more volatile a fund, the more difficult it typically is for investors to maintain a hands-off approach.
Responsible, disciplined strategies can lag, too
Sometimes, even sound approaches like investing on a regular basis can backfire, at least comparatively speaking.
Suppose you want to dollar-cost average by staking $1,000 into the same fund at the beginning of each year, for three years. Suppose, further, that the fund goes on to earn 10% the first year and 10% the second year before dropping 10% in year three. For the fund, that works out to an annualized return of 2.9%. But the investor sustains an overall loss of 0.4%. The reason?
“There was less money in the account during the first two years of positive returns and more money exposed to the loss during the third year,” Morningstar said.
A strategy of investing money on a regular basis, as when diverting a portion of your paycheck into a workplace 401(k) retirement account, is a laudable behavior, Ptak said. Still, it will give you a different end result compared with the fund in which you’re placing money. So, too, with regular, ongoing withdrawals.
Investor returns rarely will match a fund’s results exactly, since few people can buy and hold for years. But the performance-gap study shows several ways to improve your results.
One is to avoid adding a lot of money after a fund has had a nice rally. Another is to avoid selling at a price that could be near the market bottom. In addition, investors should consider automating tasks like rebalancing as much as possible, perhaps by doing it on the same day each year. (Rebalancing involves adding a little money to lagging funds while taking some chips off the table with funds that have performed especially well, to keep your overall mix or allocation in line with your objective.)
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Which type of fund is best?
Also, investors should consider sticking with more widely diversified funds and avoiding sector portfolios that hold fewer stocks, typically in one or a few industries like technology. These funds bounce around a lot more, making it harder to resist the urge to buy and sell. Conversely, more diversified funds such as asset-allocation portfolios, which typically spread their holdings among stocks, bonds, cash and perhaps other areas like real estate, deliver a smoother ride, making them more suitable for a long-term, buy-and-hold approach, Morningstar said.
In fact, investors suffered their lowest performance gap with asset allocation funds, among the categories that Morningstar studied, and the highest amount of lagging performance with sector portfolios.
Because of their smoother rides, asset-allocation and other widely diversified funds “do seem to be the easiest for investors to use,” Ptak said.
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Tense diplomatic relations may not impact trade, investment ties between India, Canada: Experts
NEW DELHI: The tense diplomatic relations between India and Canada are unlikely to impact trade and investments between the two countries as economic ties are driven by commercial considerations, according to experts. Both India and Canada trade in complementary products and do not compete on similar products.
“Hence, the trade relationship will continue to grow and not be affected by day-to-day events,” Global Trade Research Initiative (GTRI) Co-Founder Ajay Srivastava said.
Certain political developments have led to a pause in negotiations for a free trade agreement between the two countries.
On September 10, Prime Minister Narendra Modi conveyed to his Canadian counterpart Justin Trudeau India’s strong concerns about the continuing anti-India activities of extremist elements in Canada that were promoting secessionism, inciting violence against its diplomats and threatening the Indian community there.
India on Tuesday announced the expulsion of a Canadian diplomat hours after Canada asked an Indian official to leave that country, citing a “potential” Indian link to the killing of a Khalistani separatist leader in June.
Srivastava said these recent events are unlikely to affect the deep-rooted people-to-people connections, trade, and economic ties between the two nations.
Bilateral trade between India and Canada has grown significantly in recent years, reaching USD 8.16 billion in 2022-23.
India’s exports (USD 4.1 billion) to Canada include pharmaceuticals, gems and jewellery, textiles, and machinery, while Canada’s exports to India (USD 4.06 billion) include pulses, timber, pulp and paper, and mining products.
On investments, he said that Canadian pension funds will continue investing in India on grounds of India’s large market and good return on money invested.
Canadian pension funds, by the end of 2022, had invested over USD 45 billion in India, making it the fourth-largest recipient of Canadian FDI in the world.
The top sectors for Canadian pension fund investment in India include infrastructure, renewable energy, technology, and financial services.
Mumbai-based exporter and Chairman of Technocraft Industries Sharad Kumar Saraf said the present frosty relations between India and Canada are certainly a cause for concern.
“However, the bilateral trade is entirely driven by commercial considerations. Political turmoil is of a temporary nature and should not be a reason to affect trade relations,” Saraf said.
He added that even with China, India has acrimonious relations but bilateral trade continues to remain healthy.
“In fact, bilateral trade is an effective tool to improve political relations. India must make special efforts to increase our bilateral trade with Canada,” Saraf said.
India and Canada have a strong education partnership. There are over 200 educational partnerships between Indian and Canadian institutions.
In addition, over 3,19,000 Indian students are enrolled in Canadian institutions, making them the largest international student cohort in Canada, according to GTRI.
According to the Canadian Bureau for International Education (CBIE), Indian students contributed USD 4.9 billion to the Canadian economy in 2021.
Indian students are the largest international student group in Canada, accounting for 20 per cent of all international students in 2021.
Benefits of educational partnerships are mutual and hence the current situation may have no impact on the relationship, Srivastava said.
Apple supplier Foxconn aims to double India jobs and investment
Apple supplier Foxconn aims to double its workforce and investment in India by next year, a company executive said on Sunday.
Taiwan-based Foxconn, the world’s largest contract manufacturer of electronics, has rapidly expanded its presence in India by investing in manufacturing facilities in the south of the country as the company seeks to move away from China.
V Lee, Foxconn’s representative in India, in a LinkedIn post to mark Indian Prime Minister Narendra Modi’s 73rd birthday, said the company was “aiming for another doubling of employment, FDI (foreign direct investment), and business size in India” by this time next year.
He did not give more details.
Foxconn already has an iPhone factory employing 40,000 people in the state of Tamil Nadu.
In August, the state of Karnataka said the firm will invest US$600 million for two projects to make casing components for iPhones and chip-making equipment.
The company’s Chairman Liu Young-way said in an earnings briefing last month that he sees a lot of potential in India, adding: “several billion dollars in investment is only a beginning”.
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Last month, Foxconn’s billionaire founder Terry Gou said he would run for the Taiwanese presidency in next year’s election, as an independent candidate.
He said the ruling and independence-leaning Democratic Progressive Party (DPP) was unable to offer a bright future for the island and left Foxconn’s board following his decision to run.
The firm operates the world’s largest iPhone plant, in the city of Zhengzhou in Henan province.
Foxconn to double workforce, investment in India by ‘this time next year’
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