DO YOU KNOW: Why Mutual Funds seem to give higher returns than Equities?

Can we use the Ulysses pact to somehow reduce the negative impact of our behavioral traits and avoid the temptation to sell our equity investments at the worst possible time? The liquidity, transparency in pricing and ease of transaction all allow an investor to be swayed by the Siren song of greed and fear and thus actually indulge in self destructive behavior of trying to time the market and churn his portfolio. Thus the real question is how an investor, like Ulysses does, tie himself to the mast and navigate past the dangerous Seas to finally enjoy the benefits that an equity portfolio gives the investor in the long term. This is where mutual funds come to the rescue of an investor. While most sales of mutual funds is done on the basis that the fund manager actually does a great job of selecting stocks and gives the investor a return above the benchmark, the real benefit of mutual funds to the investor is that it reduces the impact of the behavioral deficiencies of the investor. The problem with most equity investments is that it can be sold easily and most often at the worst possible time due to the incredible amount of ease with which the price information is available .Tickers of stock prices are available but tickers on NAV of mutual funds are not so easily prevalent. Most advisors will only give a report once a month on the investor’s mutual funds portfolio thus insulating the investor from the daily volatility of equity prices More importantly an investor can enter into a kind of Ulysses pact with mutual funds by entering into SIPs. A SIP transaction for 36 months for e.g., binds the investor to continue to invest for that many months. While most advisors promote an SIP by saying that it improves returns over time, I feel that the most important benefit of an SIP is that it prevents the investor from self-destructive behavior. It binds the investor into a particular course of action and is thus a kind of a Ulysses pact. A closed ended fund is also a similar Ulysses pact. The investor cannot get out of the investment until the investment term is complete. Similarly, an ELSS Scheme gives both the advantages of a closed ended scheme as well as some tax benefits. The net result of the SIP advantage, the closed ended schemes, ELSS schemes and the lack of NAV information is that an investment into mutual funds tends to give much better returns to investors than an investment into equities directly. The moment the investor uses the vehicle of mutual funds to invest into equities he actually removes all the hurdles of gaining from the long term appreciation in Equities. The removal of these hurdles then allows the full benefit of an Equity investment to flow to the investor.
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