Skip to main content

Fair Returns Or Good returns

A conversation between two friends regarding equity mutual fund returns.

 M1: Did you check this out? Recent CAMS report on investment in mutual funds by millennials says 36% of mutual fund investors who redeemed in full from equity investments made losses

 M2: Yes, have seen the report. Nothing strange, given 50% redeem within 2 years. But there is more to it. CAMS report also says rest make money. Or redeem in profit.

 M1:  That's good no. Majority of investors made money…

 M2: That's what the data says. Though me thinks data hides more than it reveals

 M1: Elaborate on your conspiracy theory on this data please

 M2: 1% return is also profit, and so is 5% and 10%

 M1: Ohh. Agree, data does not elaborate much on quantum of gains or profit.

 M2: Absolutely. Gains per se are irrelevant until and unless we know the quantum and that too in comparison with risk free returns

 M1: So at what level of returns should an equity mutual fund investor be satisfied

 M2: My opinion - fair returns: 1.5 times whatever one consider risk free return. Good returns: double the risk free returns. Don't forget to adjust for taxes. Risk free investments are taxed much more heavily than risk investments

 M1: You always talk in riddles. Can't you just give plain numbers.

 M2: Nops. Two reasons why: everybody has different definition of risk free and taxation impact is different. Not to mention, risk free rates also keep changing

 M1: Ok. Assume I am getting 7.5% as risk free rate

 M2: Pre tax?

 M1: Yes.

 M2: Let me assume your tax slab is 30%. Including cess, your tax rate is 31.2%. Post tax risk free retun comes to 5.16%. So for you, from equity mutual fund investments, fair return is 8.64% and good return is 11.52%, both on pre tax basis.

 M1: 8.64% return looks less, no? 11.52% look better.

 M2: It does, if you look at all the goal projections being done mostly at 12% and higher. But if you compare with your risk free investments, I would still say 9% and above annualized ROI is still fair. Off course, anything higher is always good!!!

Comments

Post a Comment

Popular posts from this blog

Lump Sum Equity Investing – The Capital Protection Way Part II

Long ago, here  I posted how I would go about investing a sizable amount in equity index funds. I assumed in this blog that for next 5 years, equity markets will enter their worst phase and deliver poor returns – in fact negative returns of 10% annualized for next 5 years. Such a bad phase would result in equity fund corpus down by nearly 41% in absolute terms. Have the equity markets done that bad historically? Not at all. The worst case 5 year equity markets performance, basis Nifty 500 Index TRI has been in covid times @ minus 1.4% annualized for March 2015 – March 2020 period. Essentially, our assumption of minus 10% annualized ROI for 5 years was way too bad than actual worse case seen. Let us redo the numbers basis some realistic data: -           Actual worst case 5 year CAGR seen:   Minus 1.4% -           Assuming things can go even worse than this sometime in future, we c...
Post a Comment
Read more

War And Equity Investments

Uncertain times are upon us. There is a shadow of war post killing of tourists in Pahalgam. So far, equity markets have not shown any signs of cracking up despite of high expectations of armed conflict with our wayward neighbour. Is it the calm before the storm as far as equity markets are concerned? It is anybody’s guess that if a protracted war does happen, economy will take a hit in near term, which in turn will impact our daily lives, including equity markets. When and how this will happen is again anybody’s guess. Should you take a relook at your equity investments in such a scenario? Nothing wrong in being a little conservative in such times. Here’s what I think can be considered:     -           Scenario I: You have designated INR 100 for equity investments and are fully invested. While you do have money in non equity investments, in case of equity market downturn, YOU WILL NOT PULL MONEY OUT OF SUCH INVESTMENTS AND DEP...
Post a Comment
Read more

Why SIPs Work Only When You Are at It For Significantly Long Time

No, this blog is not about how a SIP  running for long periods (10 years?) lets one weather the market cycles and average your buying cost. Enough has been said about it and that remains. By the way, there’s no standard definition of “LONG PERIOD” as such. It’s left open to investing entity!!! This blog is more towards accumulating capital, as (HIGH) returns really matter only when they are earned on reasonable amount of capital. Even extraordinarily high returns on piddling capital (savings) don’t amount to much in absolute numbers. And it takes time to build up capital if you are doing it gradually, even after taking impact of compounding. Let the numbers come to our help. But first, we need to establish some benchmark to evaluate how long should one run a SIP, alongwith a projected rate of return. Here’s a simple benchmark for SIP duration – my investment should double at the end of SIP period for a particular rate of return. I will consider that duration as “LONG TERM”. ...
Post a Comment
Read more