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"Invest ₹1 lakh in this mutual fund today and turn it into ₹10 lakhs in just 5 years! 🚀 See how this fund has given 35% annualized returns over the last 3 years. Don’t miss out—act now!!!"

These days, we frequently receive messages from clients and friends sharing links or references from various "finfluencers" who claim exceptionally high returns on certain investments. They often suggest that these investments are superior to others based on their recent performance. Typically, they showcase past 1, 3, or 5 year returns and extrapolate these figures to predict returns over the next 15, 20, or even 40 years. However, what they fail to highlight is the risk involved in these investments.

If there were no risk and mutual funds consistently delivered annualized returns of 30-40% over the past few years, then what has been the long-term performance of these or similar schemes over 15 or 20 years? Upon analyzing 10- and 15-year return data of all equity mutual funds, we find that annualized returns range from 5.98% to 19.25% over 10 years and from 7.38% to 20.26% over 15 years (for actively manages equity mutual funds with minimum age 15 years as of February 2, 2025, according to Ngen Markets). Given this spectrum of returns, even after an exceptionally strong market performance in recent years, how realistic is it to expect 25-35% compounded returns for the next several decades?

Annualised returns of actively managed equity funds as on 02-02-2025 with minimum age 15 years
Source: Ngen research

On a lighter note, if markets or any financial product were guaranteed to deliver such high returns consistently, why would banks, with their vast treasuries and asset bases, pursue bonds yielding just 6-8% or offer loans at 9-12% per annum? Why would entrepreneurs strive for a return on equity (ROE) of 18-24% in their businesses, enduring hard work and capital risk, when they could simply invest and earn significantly higher returns effortlessly?

The purpose of this discussion is not to discourage investment in mutual funds or suggest they are a poor investment vehicle. In fact, mutual funds are an excellent tool for investors to allocate their money across equities, debt, or commodities according to their financial goals and risk appetite. However, setting realistic return expectations is crucial.

With recent market corrections over the past few months, many investors are questioning whether they should continue their investments or redeem their funds from equities or mutual funds. My message to them is clear: volatility is an inherent part of equity investing, whether through direct stock purchases or mutual funds. A proper understanding of the product and its risk-reward dynamics is essential for making informed investment decisions.

Instead of focusing solely on past returns, investors should adopt a long-term perspective and align their investments with their financial goals. Mutual funds, when chosen wisely and with the right expectations, can serve as a powerful wealth-building tool, offering diversification, professional management, and the potential for substantial growth over time.

Additionally, working with a qualified financial advisor or distributor can significantly enhance an investor's decision-making process. A professional can provide valuable insights, assess risk tolerance, and recommend suitable investment options tailored to an individual's financial goals. Their expertise helps investors navigate market volatility with confidence and discipline, ensuring a well-structured and informed investment journey.

Palash Singhania

Disclaimers:

Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully before investing.

This article has been reviewed and refined with the assistance of AI (ChatGPT). The content reflects the author's views and should not be considered financial advice. Readers are encouraged to consult with a qualified financial advisor before making investment decisions.