Morningstar, Inc, a provider of independent investment research, published its annual study of investor returns, which measure how the average investor fared in a fund. Morningstar Investor Return is a dollar-weighted return that incorporates the effect of cash inflows and outflows from purchases and sales as well as the increase in a fund's assets. In this study, Morningstar compared investor returns to a fund's total returns and found investors cost themselves between 0.74 percent and 1.32 percent per year by mistiming their purchases and sales of equity and bond funds during the 10-year period through Dec. 31, 2015.

"Investors tend to buy high and sell low, missing out on a fund's gains in value. Our investor returns data has shown that investing decisions made a decade ago have an impact that compounds powerfully over time,"Russel Kinnel, chair of Morningstar's North America ratings committee and editor of Morningstar® FundInvestorSM, said. "Though investor return figures have somewhat improved year over year, the latest data shows that investors still face challenges in using mutual funds correctly."

In the study, Morningstar evaluated U.S. open-end mutual funds and calculated average asset-weighted investor returns and average total fund returns. Morningstar also tested four factors and their effect on investor returns: Morningstar® Stewardship GradeSM, standard deviation, tracking error, and expense ratio.

Key highlights of the annual study include:

Morningstar Investor Returns lagged total fund returns by 1.13 percent on an average annualized basis for the 10-year periods that ended between 2012 to 2015.

Investors in allocation funds experienced the smallest gap between total returns and investor returns—17 basis points—for the 10-year period through December 2015. Municipal bond fund investors lagged total returns the most, with a 132-basis-point gap.

Investors fare better with shareholder-friendly firms. Funds with a Stewardship Grade of "A" saw investor returns beat total returns by 0.18 percent. Investor returns for funds with an "F" Stewardship Grade lagged total returns by 2.59 percent.

When grouped by asset class, funds with higher volatility negatively affect investor returns. The most-volatile quintile of funds saw investor returns lag by 1.29 percent. Investor returns in the least-volatile quintile of funds beat total returns by 0.81 percent.

Investor returns lagged total returns of funds with high tracking error, which measures the extent to which a fund's returns vary from the benchmark, by 0.49 percent. Meanwhile, investor returns beat the total returns of funds with the lowest tracking error by 0.82 percent.

Low-cost funds exhibit smaller gaps between total returns and investor returns than high-cost funds. Investor returns for the least-expensive quintile of all funds were 6.5 percent annualized in a five-year period compared with 6.39 percent for the average fund, as investors timed their investments well.

However, the average investor in the priciest quintile of funds had returns of 3.43 percent annualized compared with returns of 4.8 percent for the average fund, showing that the average investor in the least-expensive quintile nearly doubled returns of the average investor in the priciest quintile.