A mutual fund can generate strong returns over a period without its investors necessarily earning the same returns. In some cases, the difference can be surprisingly large, depending on when investors put their money into the fund.
Small-cap funds provide a striking example. Between March 2013 and June 2020, the category generated a 14.8% CAGR, according to the September 2026 edition of DSP Mutual Fund’s Netra report. However, investors’ actual return during the same period was -1.6%.
That represents a difference of more than 16 percentage points. Small-cap funds are not the only category where the return generated by the fund and the return earned by investors can vary significantly.
Why can MF returns and investor returns differ?
The timing of investments is one of the biggest reasons behind the difference.
A mutual fund’s return is based on how its NAV performs over a particular period. Investors, however, may not have the same amount of money invested throughout that entire period.
Investors may enter a fund after it has already delivered substantial gains, increase their investments when recent performance looks attractive and then face losses when the market subsequently declines.
This is why DSP Mutual Fund also examines investor returns, which are money-weighted returns. In simple terms, this approach gives greater weight to periods when investors have larger amounts of money invested.
Consequently, the return experienced by investors can be significantly different from the return reported by the fund category.
DSP’s analysis covers active regular-growth schemes. Momentum funds are excluded, while passive funds are included because active funds in the category have a relatively limited track record.
Small-cap funds show impact of timing
Cash-flow data illustrates how the gap between fund and investor returns can emerge.
Around ₹17,000 crore flowed into small-cap funds during the market boom between March 2013 and December 2017. However, investors put another ₹27,000 crore into the category between January 2018 and June 2020, when small-cap funds were experiencing a downturn.
Therefore, although the category delivered a 14.8% CAGR over the entire period, a significant portion of investors’ money entered during the weaker phase rather than participating in the complete market cycle.
As a result, the investor return came to -1.6%, despite the category posting a positive double-digit CAGR.
Technology funds offer another example of how investment timing can affect actual returns.
The category had approximately ₹5,000 crore in assets under management in March 2021, following a rally of more than 100%. During the next 24 months, investors added another ₹19,000 crore, almost four times the amount already invested.
This indicates that a substantial amount of money entered the category after a major part of the rally had already taken place.
Between July 2019 and July 2026, technology funds generated a 17% CAGR. However, investors earned only 7.6%, resulting in a 9.4 percentage-point difference.
What does this mean for MF investors?
The data underlines an important lesson: the return displayed for a mutual fund category may not be the same as the return actually earned by its investors.
When large amounts of money enter a fund after a strong rally, new investors do not benefit from gains generated before their entry. Their investment journey begins at the NAV at which they buy, making subsequent market performance more important to their actual returns.
This does not mean investors should automatically avoid a fund category after a period of strong performance. However, past or recent returns alone should not be the deciding factor for investing.
The DSP analysis highlights the risks of chasing recent winners and shows how investor behaviour and timing can create a substantial gap between headline fund returns and the returns investors ultimately take home.