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When we invest, especially in equities and mutual funds, we often hear phrases like “this fund has delivered 12% annualised return over 5 years.”
At first glance, many investors assume this means their money grew steadily by 12% each year. But that’s not how equity markets work.

The truth is, investment returns are not linear. Equity and related instruments fluctuate based on market conditions, business cycles, investor sentiment, and global events. This means that the path to a 12% annualised return might involve big ups in some years, downs in others, and steady performance in between.

Understanding this reality is crucial for making informed investment decisions and for staying committed to your financial goals.

🔹 Linear Growth: The Misconception

Let’s say you invest ₹1,00,000 expecting a 12% annualised return for 5 years. You might imagine a smooth, linear compounding journey:

• Year 1: ₹1,12,000
• Year 2: ₹1,25,440
• Year 3: ₹1,40,493
• Year 4: ₹1,57,352
• Year 5: ₹1,76,234

This shows perfect compounding. It’s neat and predictable—but unfortunately, it’s not how equity investing works.

🔹 The Reality: Volatility Along the Way

In actual markets, your investment journey could look like this instead:

• Year 1: +25% → ₹1,25,000
• Year 2: -10% → ₹1,12,500
• Year 3: +35% → ₹1,51,875
• Year 4: +8% → ₹1,64,025
• Year 5: +7% → ₹1,75,507

Notice that the final outcome is still in line with 12% annualised growth (~₹1,76,000 after 5 years)—but the path is far from linear. Some years bring sharp gains, others deliver declines, but over time the power of compounding brings the return closer to the expected average.

🔹 Why Understanding This Matters

1. Avoid Panic During Market Dips
   Short-term negative returns do not mean your investment has failed. They are part of the natural market cycle.
2. Stay Committed for Long-Term Wealth
   Equity markets reward patience. Trying to “time the market” often results in missing the best-performing days.
3. Appreciate the Role of Compounding
   The “annualised return” (CAGR) is a smoothing measure—it explains the growth as if it were consistent. But it only reflects the final result, not the year-to-year journey.
4. Volatility = Opportunity
   Ups and downs in the market are what make higher returns possible. Without volatility, equities wouldn’t be able to outperform fixed deposits and bonds over the long term.

🔹 Practical Tips for Investors

• Set the Right Expectations: Don’t expect straight-line growth in equities.
• Think Long-Term: Focus on 5–10 years or more, not 6–12 months.
• Diversify: Balance equity with debt, gold, or other asset classes to reduce the impact of volatility.
• Use SIPs: Systematic Investment Plans smooth out volatility by investing regularly through ups and downs.
• Review Periodically, Not Daily: Annual reviews help you stay on track without being swayed by short-term noise.

✅ The Takeaway

When you hear that an investment delivered 12% annualised return over 5 years, remember:
👉 It does not mean a consistent 12% every year.
👉 Some years could see sharp gains, while others may even show negative returns.
👉 What matters is the compounded outcome over the long term.

The real secret to wealth creation is not expecting smooth, linear growth but embracing volatility as part of the journey and staying disciplined with your investment plan.

⚠️ Disclaimer

• Mutual Fund Investments are subject to market risks. Read all scheme-related documents carefully before investing. Past performance does not guarantee future results. Investors should consult a financial advisor to understand what suits their personal financial goals.
• This article has been drafted with the assistance of ChatGPT (an AI language model by OpenAI) for educational purposes. Readers are encouraged to verify facts and seek professional advice before making financial decisions.