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Can I Predict My Equity Returns Based on Past Performance?

The performance of a fund varies from year to year based on the performance of the overall market and specifically the investment choices made by the fund managers.

A customer of ours recently sent us this question

"I've checked a few funds returning above 40% and near to 50% for one year. If I invest a lumpsum Rs 1,00,000/- into such funds generating 40-50%, does it mean that the accumulated amount after 12 months span would be around Rs.140000? 100000 + 40000 (40% returns)"

This is a very common return calculation mistake people make when it comes to evaluating investing in a particular mutual fund.

The performance of a fund varies from year to year based on the performance of the overall market and specifically the investment choices made by the fund managers.

  1. You should not be swayed by the short-term (1-2 year) performance for selection. At Scripbox we look at a minimum 5 year track record of the fund during our short listing process. Equity mutual funds are best suited for your goals with an investment horizon of more than 5 years.
  2. Equity mutual funds fluctuate a lot and you cannot say that your 1 lakh will grow to Rs 1.4 lakhs in one year just because there was 40% increase last year. Growth could be 20%, 10% zero or even negative in 1 year but it historically averages out over time at a rate much higher than inflation. This is what we mean by volatility.

Over the long term (5-7 years), equity funds have given a 14-16% return and that is the rate of return you should use while planning.

If you have a shorter investment horizon (3 years), we recommend looking at debt funds which are an excellent tax-efficient alternative to bank FDs.

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