Mind the Gap: An Empirical Analysis of Mutual Fund Returns, Behavioral Factors, and Investment Strategies

In a highly volatile financial market, investors in mutual funds frequently encounter a discrepancy — a gap — between their actual personal investment returns and the fund’s time-weighted performance. This study aims to quantify the magnitude of this gap and identify its primary drivers within the Russian market. The research is based on a sample of 506 open-ended equity and bond funds covering January 2005 to August 2025 and 83 exchange-traded equity and bond funds covering January 2021 to August 2025. The findings indicate that in open-ended equity funds, investors underperformed the funds by an average of 0.87 percentage points (p.p.) per annum, while in open-ended bond funds, the gap amounted to 0.29 p.p. Market timing was identified as the predominant explanatory factor for this gap in open-ended funds, with its scale significantly influenced by market volatility, fund size, and the RUONIA rate. While timing effects were central, the influence of past returns also exerted a negative impact on investor outcomes. Conversely, in exchange-traded funds, investor returns averaged higher than fund returns (yielding negative gaps of −0.31 p.p. for bonds and −1.39 p.p. for equities), a phenomenon potentially attributed to market-maker activities. A comparative analysis of capital allocation strategies over time demonstrates that money-cost averaging and value averaging are the most profitable and resilient strategies, consistently outperforming observed irregular investment patterns. The study concludes that irrational behavior and speculative market-timing attempts lead to systematic return losses. When underlying assets are highly volatile, long-term investors are advised to employ regular contribution strategies to mitigate behavioral risks. Information about the return gap can be used to promote more rational investment behavior.