Staying Invested in Mutual Funds Pays Off: Data Shows

Most investors think of themselves as rational decision-makers, guided by data and logic. Yet, when it comes to money, psychology often takes the driver’s seat. One of the most common and least acknowledged biases influencing investor behaviour is the endowment effect.

First described by Nobel laureates Daniel Kahneman, Amos Tversky, and Richard Thaler, the endowment effect refers to our tendency to assign higher value to things we already own, simply because they belong to us. In financial markets, this translates into investors clinging to familiar mutual fund schemes, resisting change even when experts advise periodic portfolio rebalancing.

But is such loyalty irrational? Or is there a data-driven argument for holding on? To answer this, I turned to long-term evidence not opinion.

The Data Lens: 17 Mutual Funds Across Categories

To examine whether patience truly pays, I analysed the long-term performance of 17 actively managed mutual fund schemes, covering large-cap, mid-cap, small-cap, flexi-cap, multi-cap, and hybrid categories. The objective was to evaluate whether frequent switching between funds often motivated by short-term performance or sentiment — actually leads to better outcomes over time.

Each scheme was tracked across 3-, 5-, 10-, and 15-year horizons using publicly available data from AMFI, Value Research Online, and Morningstar India. These funds represented a diverse cross-section of management styles, asset allocations, and risk profiles a fair mirror of the Indian mutual fund universe.

The results were striking. While short-term returns varied widely, the long-term outcomes converged within a surprisingly narrow band. Over fifteen years, the annualised returns of the 17 funds fell largely between 13% and 18%, with most clustering near 15%, forming what statisticians would recognise as a bell-curve distribution.

This finding alone carries a powerful message: despite different journeys varied fund managers, investment philosophies, and interim volatility most funds arrived at nearly the same destination.

Convergence Over Time: What the Statistics Reveal

The performance distribution demonstrated a clear pattern of convergence - a hallmark of long-term investing. When plotted on a probability curve, the data revealed the following ranges:

• Approximately 68% of the funds (within one standard deviation) delivered annualised returns between 14.05% and 16.64%.

• Around 95% of them (within two standard deviations) fell between 12.76% and 17.63%.

• Almost 99.7% (within three standard deviations) stayed within 11.47% and 18.92%.

Such a tight clustering means that the difference between the “best” and “worst” long-term performers was marginal. In other words, even if you didn’t pick the “top” fund fifteen years ago, your patience would still have been rewarded with nearly equivalent returns. This convergence can be explained by the intrinsic diversification and mean-reverting nature of markets.

A well-managed mutual fund particularly in diversified equity categories inherently balances risk through exposure to 40–60 stocks across industries. Over long cycles, market forces pull outliers back toward the mean. Temporary winners and losers tend to rotate, while the investor who simply stays invested benefits from compounding and internal rebalancing executed by the fund manager.

Beyond Mid-Caps: The Pattern Holds Across Categories

To ensure the pattern wasn’t unique to mid-caps, I extended the analysis using category-level return data from Value Research and AMFI.

As of March 2024, the 15-year annualised returns across key equity segments were as follows:

Category 15-Year CAGR (Approx.) Range of Schemes

Large-Cap Equity 12–14% Moderate dispersion

Mid-Cap Equity 14–16% Narrow dispersion

Small-Cap Equity 15–18% Slightly wider, higher volatility

Multi-Cap / Flexi-Cap 13–15% Similar to index

Hybrid (Balanced Advantage/ Aggressive) 10–12% Lower risk, steadier curve

Despite different risk levels, the same broad principle emerged time compresses dispersion. Whether one invested in large-cap stability or small-cap aggression, a long-term investor’s eventual returns gravitated toward the mid-teens.

This suggests that fund selection matters less than investor behaviour. The longer the holding period, the more one benefits from the self-correcting forces of diversification and compounding.

Behavioural Finance Meets Market Reality

These results also align closely with behavioural finance research. According to Morningstar’s “Mind the Gap” study, the average investor underperforms the very funds they invest in by 1.5–2.0 percentage points per year. This “behaviour gap” arises because investors enter and exit funds at emotionally charged moments buying after good performance and selling during declines.

In contrast, investors who stay invested through market cycles not only capture full fund returns but also experience less psychological stress. The data suggests that the so-called “lazy” investor the one who forgets to rebalance may, in fact, be more rational than the hyper-active one.

This does not mean review is unnecessary. It means that reactive switching, often driven by the fear of missing out or the discomfort of short-term loss, rarely improves outcomes.

Why Time is the Great Equaliser

Several structural reasons explain why patience outperforms impulsivity:

1. Built-in optimisation: Fund managers constantly adjust portfolios, trimming overvalued positions and adding emerging opportunities. Attempting to “re-optimise” from outside often duplicates or disrupts that process.

2. Cost and tax friction: Frequent switching invites exit loads, short-term capital gains tax, and transaction costs eroding any incremental returns achieved through timing.

3. Mean reversion: Sectors and styles rotate in favour. Today’s laggard often becomes tomorrow’s leader. Staying invested ensures participation across full market cycles.

4. Compounding: The exponential nature of compounding rewards consistency. Missing even a few strong months of returns can meaningfully reduce the end result.

As John Bogle, founder of Vanguard, famously argued, “Don’t look for the needle in the haystack. Just buy the haystack and hold it.” The same principle applies across well-managed active funds in India.

The Rationality of Staying the Course

The convergence observed across categories underscores an important truth: discipline, not constant decision-making, drives long-term wealth creation.

For retail investors with time horizons exceeding ten years, the data supports a low-churn approach. The marginal benefits of switching are statistically dwarfed by the costs both financial and emotional of frequent repositioning.

Of course, tactical allocation has its place. Experienced advisors and institutional investors, equipped with valuation frameworks and access to institutional-grade data, may successfully adjust exposure between segments. But for most individual investors, time in the market continues to beat timing the market not as a cliché, but as a statistically verifiable reality.

When Psychology and Statistics Align

What makes this analysis interesting is that it bridges two worlds: psychology and statistics. The endowment effect that emotional attachment to one’s funds is often portrayed negatively. Yet the numbers suggest that moderate attachment can be beneficial, encouraging investors to stay invested and reap compounding benefits.

In this rare case, emotion and evidence point in the same direction. Your natural reluctance to sell may not be a weakness; it could be a form of behavioural discipline, keeping you anchored through volatility.

Let the Data Decide

Over fifteen years, the Indian mutual fund industry has grown from ₹10 trillion to over ₹58 trillion in assets under management (AMFI, 2025). With greater participation comes a growing need for investor education grounded not in anecdotes but in data.

The evidence from this cross-category, 15-year analysis is clear:

• Long-term returns cluster tightly around the mean.

• Volatility smooths out with time.

• Patience is statistically rewarded.

So, if you find yourself debating whether to switch schemes or stay put, remember it’s not sentiment. It’s statistics. The smartest move you can make might simply be to do nothing.

As the markets continue to test emotions and headlines tempt investors with the next “top performer,” the real outperformance lies quietly in consistency. The wisdom of long-term investing remains elegantly simple: stay the course, stay invested, and let time do the compounding.

This article is authored by Yaseen Sahar, an investment management expert