“How much returns to expect from mutual funds” is every investor’s question. A lot of popular media stories bait you with stories of Top 5 or Top 10 best mutual funds, highest performing mutual funds. Beware. These lists based on mutual fund returns, if followed blindly, can do more harm than good.
Today, I am sharing with you two of my earlier notes which focus on what returns to expect from mutual funds and how your biases affect you in determining this number.
We develop good habits and thinking when we repeat the process, n times. So, go ahead and strengthen your own mental framework about returns, inflation and biases.
Returns from Mutual Funds
As an investor, you invest in mutual funds to earn a higher return than your other investments. The benchmark that you use is of past returns and hence your expectations are also high. For some, they are not sure what to expect.
Let’s try and use a data based approach to determine these expectations.
So, what returns do you expect from your mutual funds?
10%?
15%?
20%?
Actually, it depends on what kind of a mutual fund you invest in.
Click here to read the complete note.
Mutual Fund Returns and your Bias
In a recent email exchange with a Unovestor, I was persuading him to consider more reasonable returns from his investments. His comments:
If I cannot expect even 15 to 18% returns from equity or mutual funds then what is the point of investing in them.
Even real estate investment held over long periods of time can give 15% returns.
Now, there are certain issues with this line of thinking.
The behavioural experts have defined a good list of cognitive biases that influence our thought process and this argument was no exception.
In this particular case, there are 2 clear biases that stand out. There is yet another one, that I add.
Read up here to know if you are affected by these biases too.
There is one enemy of your money that we conveniently forget or underestimate – INFLATION. More than anything else, you need to keep an eye on that.
What is your personal inflation rate? How much returns are you expecting from your investments?
I’ve 3 funds (two multicaps and one midcap) in my portfolio, two of those funds are from the Unovest premium aggressive portfolio. This is in 40:30:30 ratio (multicap1:multicap2:midcap).
My goals are set with an expected rate of return of 12% after taxes. When I decided to invest in mutual funds, I started off expecting 18% (lol). Even now, I’m on the very aggressive side. My goals are 15-25 years away from today. The midcap may test my patience. May be the multicaps will do as well. I’ll keep stepping up my SIPs whenever I can. And hopefully, that will help me retire sooner 🙂
Vipin, do to think I’m being realistic with the kind of equity portfolio that I have to expect 12% after taxes?
Srikanth, I read Vandhi’s reply and for once I thought – when did I reply? 😉
I wouldn’t question your expectations. Seems good to me.
Lol, I read your reply first before going down read his reply. But yeah, the words are getting too similar 🙂
Srikanth,
Your portfolio is very compact and seems to be less overlapped one. Is your expectation is at Portfolio or fund level. What about Debt fund expectations.
Recent LTCG tax will add little impact to overall expectation to equity funds. But for longer goal period like yours , i think 12% is reasonable.
Anyhow our expert Vipin sir will give us clear path on expectations. Over to Vipin 🙂
Vandhi, are you practising part time as an advisor? 😉 Good job!
Haha… Effect of avid reading of Unovest (aka Vipin) blog. And you are tirelessly answering all my stupid queries from the day one 🙂
🙂
Vandhi, first of all, I’m glad both you and, of course, our main man, Vipin, think the expectations are reasonable, even after accounting for tax.
My expectations are at a portfolio level (but equity only), so it will be the weighted average XIRR of all these three funds. I may just add another small cap in future, but only if Vipin adds it to the Unovest MF portfolio.
Currently, my only fixed income/debt savings is my mandatory EPF contribution, which is around 30% of my equity allocation. I don’t want to add any more than this as my fixed income/debt savings at this age.
I’m thinking of adding a debt fund (or using my existing Ultra Short Term debt fund which I use as an alternative to savings account) for the purpose of building a corpus as a health fund considering the rising cost of healthcare. I may use one of the existing multicaps + this UST fund (in 50:50 ratio) for building that health fund corpus. In urgent needs, I’ll use the money from the UST fund, and the rebalance the portfolio to 50:50 at times when I’m comfortable doing.
I’m still thinking over how best to do this. Main reason why I’m even thinking of this is due to huge medical expenses in family in the past, where even a really good cover from employer wasn’t sufficiently covering 35% of the medical expense then. I feel this is something most of us miss building, and club it with our general emergency fund, which IMHO, we shouldn’t, especially with the rising healthcare inflation.
Perhaps a topic for Vipin to cover 😉
Srikanth,
You made valid point on Healthcare fund. I suggest along with Ultra short term fund add Balanced fund to build corpus for Health care emergency. Keep adding small portion of your monthly savings into this funds and run it for years.
That’s precisely my plan, Vandhi. I’m just not sure whether to add a balanced fund or a multicap and do the balancing myself.
Balanced fund is less volatile than Multicap fund and it will be my choice for this kind of medical emergency fund .
Choose whichever is suitable to you .
SO, I guess i will be out of my job. Vandhi is your man!
No Sir, With out Teacher, how can a student lead a class 🙂
You are kind!