The Behavioural Gap - Why Investors do not get returns they should?

Friday, February 3 2023
Source/Contribution by : NJ Publications

Have you wondered why your fund seems to have delivered fantastic returns and yet your returns have been on the lower side? Well you are not alone. Any market investment can be said to give two types of returns or performance - first its actual market returns /performance and second, the returns /performance of the investor holding the investment. Most of us would think that the two should be similar, in the same range. However, often the reality is quite different, especially in the long run.

Investor behaviour has been identified as one factor with the highest impact on long-term outcomes. In fact, there is a complete field of studies dedicated to this aspect called as ‘behavioural finance’. The field of behavioural finance deals with investor behaviour in the real world as opposed to the mainstream market assumptions that the market is efficient, and all players act rationally to make optimum decisions to maximise their gains. However, behavioural finance studies have countered this and has shown that there are social, emotional and cognitive factors impacting our investment decisions and we do not really end up investing rationally, which is what we think we do. These behavioural biases undermine our decision-making and impact the investor performance or long-term success in investing. This is much more common than we think and results in the ‘behavioural gap’ that we are alluding to. 

Behavioural Gap:  

Facts and historical evidence across different markets and multiple studies have proven that the market performance has been much higher than the investor performance in the same market /investment across different countries and spanning over many decades. The results are often the same, irrespective of even investment horizon. This difference between the return an investment organically produces over a fixed time frame, and the return an investor in that very investment actually earns, is coined as ‘behaviour gap’.

There is a popular research report published every year by DALBAR on ‘Quantitative Analysis of Investor Behavior’ for past 22 years. Here are the brief extracts from the report for the period ending on 31st December 2022:


30 years

20 years 

10 years

5 Years

3 years

1 Year

Average Equity Fund Investor % 







S&P 500 % 







Behavioural Gap







As can be clearly seen, the broad stock market in the US has outperformed the average equity fund investor by a huge margin, almost 50%, over the 30-year period. Interestingly, the out performance is seen across all holding periods. Similar results were seen in almost all the past studies carried by DALBAR. Results have been on similar lines by many more studies. 

Closer home too, a recent study done by one domestic fund house for the period from 2003 to 2022 showed that the equity funds delivered impressive returns of 19.1%, but the investor returns were just at 13.8%. The out performance of nearly 38%, compounded, over nearly 20 years of investment is very alarming to say the least. 

The verdict is simple - even though the Indian equity investor has created wealth, outperforming all other asset classes over the past two decades, he has clearly missed creating many more multiples of wealth creation due to his behaviour. 

What should investors do?

As witnessed, one of the biggest roadblocks to investing success is investor behaviour, often driven by biases and emotions. Investors let their biases and emotions dictate their investment decisions. We have often spoken of the cycle of ‘Fear - Greed - Hope’ seen in the markets. Investors typically panic and sell when markets correct and become greedy and buy when markets have moved up. However, avoiding our personal biases, and emotions and making rational decisions in real life is a tough task. 

On the positive side, there are many famous and successful investors whom we know by names and still many who are silently enjoying their success around us. These are investors who have overcome the factors we spoke about above, made fewer mistakes, corrected themselves in time and then played the game well in the long term. So what would distinguish these successful investors and the average equity fund investor? 

Successful investors have been found to portray certain characteristics, unlike average investors. They are more rational, they do not let personal biases impact investment decisions, they are more patient and do not let emotions cloud their judgement, are more focused on the wealth creation journey rather than the money, are research and data-oriented, and they keep the big, long-term picture in mind. As common investors, this can be a lot to digest and copy at one go but we surely can learn and dig deeper into each aspect of our investment journey. 

The true role of mutual fund distributors /investment advisors:

There is an interesting thing. Investors who are guided by qualified experts say, experienced mutual fund (MF) distributors or investment advisors, are likely to have outperformed the average investor. The true role of your MF distributor is not to find the top-performing fund or service your queries. The true role is of managing and even controlling investor behaviour - making sure that factors like personal biases, emotions, ill information, lack of knowledge, etc, do not impact your investment decisions. They would make sure to push you to save and invest more, motivate you to see the big picture and at times, even disagree with you, see the big picture which you do not see and give you conviction and confidence when you need it the most. That’s the true, invaluable role that your mutual fund distributor plays and one cannot really put a price on this or quantify this in terms of the value it can bring to your financial journey. What we can assume though is that if we do follow and seek guidance from our MF distributors /advisors, we would be able to bridge the investor’s behavioural gap by a large extent. With just a couple of percentage differences, there can be life-changing for you when compounded over the long term. 


The behaviour gap is the reason we often feel that we have failed to create wealth as much as we could have, given the impressive historical performance of the equity markets. More than timing the markets or product /fund selection, it is how we behave and make decisions at the overall portfolio level that truly matters. It is time for us to also acknowledge this fact, focus inwards and find ways of becoming better investors with time, knowledge and experience. Surely, we are supported and guided by our MF distributors /advisors in this journey. What is also needed is that we listen to them more, make decisions and take action. And let deep, meaningful conversations take place.

At, Invest Easy(Yasmin Vora) our mission is to provide our clients with the best solutions in wealth creation and wealth management. We are driven to provide clients with simple, unbiased and uncluttered professional advice that adds value to their quality of life and results in actionable solutions.

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