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

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

Equity Investing – The Worst Case Scenario, 10 Year Horizon Basis

10 year CAGR for the period 1 April 2010 – 31 March 2020: 6.19%. Covid 19 made equity market tumble and we had to contend with a lowly equity market returns. We can safely say 10 years is long enough investment horizon. Investment return of this quantum will easily qualify as worst case scenario. And it was. If we consider only point to point figure. Here’s what unique to listed equity investing: it is NOT like buying property where you lock in “one” price at a point in time. Then why look at worst case (or even best or average case) on point to point basis? My opinion – to get an idea of real worst case scenario, looking at data on 3 year moving average basis makes better sense. Let’s see what numbers say. Point to point returns of 10 year period ending: -           31 March 2018:                          ...
Post a Comment
Read more

Asset Inventory & Investment Success

You don’t know how well your money is doing until you have a clear picture where all your money is. That is where the role of periodically working out asset inventory comes into play. While it may appear to be a chore initially (and it is), if one perseveres, the results may be the best guide a very successful financial situation. The best part – you don’t need any fancy apps or other tools to go about it. Simple excel sheet or even a diary if you prefer writing can do the job near perfectly. I am deliberately not putting up any sample asset inventory format. That is left to each individual. The format you go by can be a simple one, with just the asset type & associated number against it. Or an advanced one where you also plug in realistic expected return. Maybe even a super advanced one (if I can say that), where you adjust the weighted average portfolio returns with expected inflation to get an idea how well your investments are keeping up with purchasing power capacity. Wh...
Post a Comment
Read more