You know Demonetization was not a “demon” for the investment industry. In fact, papers are pink with praises how physical asset lovers changed loyalty and started sailing with financial assets. But a new investor someone who started in 2016 or 2015 has started on a very high note. He has only seen green pasture and has not experienced the bear phase. Has he overestimated and over expected returns? What should be expected returns equity MFs or equity markets?
This article also talks about the legendary disclaimer that all Mutual Fund forms/brochure have. “Past Performance is not an indicator of future performance”. I beg to differ here. Past performance can indicate future performance. You need to use historical figures in perspective, then you can arrive at a realistic expected market performance. Read ahead to see how…
No one likes being told that you can get negative returns. But the question is of reality and about like or dislike. If you have started investing in equity or opened an MF SIP, the chances are likely that you are over expecting returns based on last 3-4 years of performance.
What do you think?
Just go back to thinking mode and try to answer this ? What returns are you expecting in say next 5-10 years? After all, you are invested in equity side portfolio and I believe my readers would have never invested in equity for less than 5 years.
So think of a number.
If it is more than 12%-14%, the baggage you are carrying is light but if you are expecting more than 15%, it is tonnes of heavy bags you are carrying.
And I know some of you were expecting more than 20%. Because your broker/adviser said so. Next time when you visit a bank branch, ask the banker or the Relationship Manager what returns will equity funds give? You will be surprised as he may cross your figure too!
I am not talking about individual company’s returns. I am talking about portfolios which have stocks that go through cycles, one which goes through bad phases of business and portfolios which comprises of debt too. This is in reference to aggregate returns the markets will generate.
I will come to “why only 12-15%” part, but let’s see why expected returns in equity MFs are on the higher side- perception wise?
Reasons for high expected returns in equity MFs
- Equity has been taught as speculation by the upbringing that we had. No one teaches the compounding benefits. We are told that equity is a risk. Not a gentlemen subject. Only money minded people indulge in something like this.
- Equity is treated as self destructing fire. Stories of suicides, bad people buying shares and spending money on horses and casinos are in mind of investors. People losing their fortunes or promoters losing their companies to villainous partners is very much depicted in media and movies.
- Agents/brokers find very easy to sell something when they can overestimate and make you happy. You are happy with 10%, but they will promise 20%.
- Short-term returns are always confused as with “all-time returns”. Investor when they see 50% in 10 days, often complain when they see just 25% in next 10 days. “Ab performance kam ho gai hai” (now performance has dropped) is a common complaint.
So can we find expected returns equity MFs?
Just read these lines very carefully as they contain very straight & data enabled points:
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- Indian economy is growing at a very constant secular rate.
If you look at last 30-40 years, economic growth has very less variation & volatility. Situations change like elections, terror attacks, global crisis or GST etc. But economy keeps on performing with very fewer ups & downs.
- If you see any 3-5 years period from this last 40 years, the real GDP growth in Rupee terms has been 12-16%. This means Economy and Inflation added together have given returns of around 12-16% range.
- The growth rate is very silent and works on various factors like changing demographics, reducing number of large families, improving affordability, changes in technology and shrinking life cycles of products etc.
- Very rare you hear these things as a headline as these factors keep on working 24/7 in the background away from the chaos of equity markets.
- Do you know 90% of Indians have mobiles, but only 10% have cars and only 4% have ACs? So the growth that has happened in mobile phones will probably happen to cars and AC companies but it will take some time.
- So the economy is growing at around 15% kind of rate. And the rate is not impacted by noise and bigger factors are working as accelerators.
- Markets have been very volatile. There have been times when market gave 260% and times when they lost 50% plus in one go. Out of these 38 years, 14 years it has given negative
- But the average growth rate of Sensex is also 15% per year.
- So markets have huge up & down periods but they also average around 15% only.
- Sensex started in 1979 at 100 points value. Roughly around 38 years ago. If someone is growing at 15% per annum it takes around 4.5 Years to double.
- So the value of Sensex ideally should be:
So here we are already!
It tells us that no one knows what will be a market after 3 months or 1 year or 3 years.
But if someone is invested for 10 Years approx he can expect to make 13-15%. Any long-term decrease or increase in GDP will have an impact on your long-term returns.
You don’t need huge IQ to make money, you need huge patience.
Does past performance indicate future returns?
Yes, they do. Look at above calculation, it comes from analyzing the historical performance only. History is not always numbers – these are lessons too.
Many new investors will read this, and I meant to shock them. But as it is said, if the foundation is honest the relationship is going to be long.
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