Morningstar's Mind the Gap (India) study is designed to compare rupee-weighted internal rate-of-return calculations with time-weighted total returns to see how large the gap, or difference, has been over time.
The dataset only captures net assets, cash flows, and returns for funds that were created at least three years
ago until June 2022.
For the purposes of our analysis we have excluded the following categories, arbitrage funds, Fund of Funds
(Domestic), liquid funds, ultra-short duration funds, overnight funds, equity savings funds, money market funds,
retirement funds, children funds and low duration funds. We have only considered share classes which are not
closed to investors (except for global category). We have excluded funds where the data for estimated monthly
flows is not calculated for more than 5% of the desired period of three-years, five-years and 10-year period.
Once the monthly cash flows are available for the period in question, we calculate investor returns. The
calculation is similar to an internal rate of return, or IRR, and measures the compound growth rate of the value
of all rupees invested in the fund over the evaluation period. As with an IRR calculation, investor return is the
constant monthly rate of return that makes the beginning assets equal to the ending assets with all monthly
cash flows accounted for. We derive investor returns by using an iterative process, running a program that
attempts to solve for the constant rate of return and adjusting the estimate up and down until it converges on
a solution. After calculating investor returns for each month, we link them together to calculate an annualized
return for the three year, five-year and 10-year period.
We use time-weighted total returns, weighted by asset size, as a benchmark for comparison with investor
returns. (The asset-weighted return average weights each fund’s return based on its average asset size over
a specific period of three-years, five-years and 10-years as of June 2022 separately as per the category and
broad asset classes).
We refer to the difference between investor returns and total returns as the gap or investor return gap.
The study includes investor returns and total returns surviving mutual funds schemes with regular share class.
Morningstar calculates estimated net cash flows for global open-end funds and ETFs, an estimate of the money put in or withdrawn by fund investors, accounting for reinvestment of distributions. We use total net assets and returns as a basis of the calculation. Flows are computed monthly and daily if the data affords it.
Because investor returns over shorter periods aren't as meaningful, we focus the study on long-term results.
The aggregate numbers shown in the study are based on the three-year, five-year and 10-year period ended
June 30, 2022. We run the data based on category groups as well as broad asset classes, which allows for a
more detailed view of investor return patterns across different types of funds.