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Save more or chase “returns”? What works better?

When I started investing myself, I too believed in these metrics blindly and chose based on that. It took many years of learning and real-life investing experience for me to realise a subtle truth. That truth was simply that growth rates matter but they are still subservient to one key factor which is much more in your control than the markets.

Speak to any new investor and what is the first thing they mention? Returns!

Most new equity investors think about maximising returns as that is what is marketed and seems to be the objective that is talked about the most.

That’s the basis on which they choose the so-called best mutual funds. Star ratings, 3 year returns, and last year’s returns simply reinforce this view. I mean, these are simple to assess metrics that show a nice little number helpfully, and yes seductively, coloured red or green. 

When I started investing myself, I too believed in these metrics blindly and chose based on that. It took many years of learning and real-life investing experience for me to realise a subtle truth.

That truth was simply that growth rates matter but they are still subservient to one key factor which is much more in your control than the markets.

Not saving enough

I came across a thought in a brilliant blog post on personal finance and investing by Nick Maggiuli. This has been something many investment experts know but don’t communicate enough.

How much you invest matters more than the growth rate your investment delivers. Want proof? Look at the numbers below.

Scenario 1 – Savings rate goes up but growth rate goes down


As you can see, whether market returns go down or go up, your investing amount plays a greater role in deciding your final corpus. In the long run, changes in growth rates or returns tend to be in single digits even if in the short run they can differ significantly between two years.

Scenario 2 – Growth rate goes up but savings rate goes down


As you can see, whether market returns go down or go up, your investing amount plays a greater role in deciding your final corpus. In the long run, changes in growth rates or returns tend to be in single digits even if in the short run they can differ significantly between two years.

Let’s look at a larger monthly investment made for 10 years:



To match the corpus that a Rs 30,000 SIP can generate in 10 years at a rather achievable 10% growth rate, you’d need an 16%-18% growth rate if you invest Rs 10,000 less. 

See the difference? A bigger SIP matters a lot more when it comes to your final corpus. This is exactly why saving more and then investing more is a better strategy than trying to get a few percentage points more by trying to choose a mutual fund on the basis of only the best returns. You and I can hardly do anything about the growth rate equity markets deliver but we can do a lot more about saving that extra 10K.

One may argue that it is the fund manager’s job, or the investment platform you chose, to give you the best possible performance. Indeed, it is, but all performance is relative to a benchmark and if you are planning for a financial goal, it is always a far more prudent proposition to consider benchmark growth rates rather than only what a fund offers. 

You can always change the fund but you can’t change markets so easily.  This is why a conservative but reliable fund might do better for long term goals rather than one which offers spectacular returns for just a few years thanks to some strategy working in a particular market. Consider advertised returns but don’t bet the whole farm on it!

Wise investors focus on increasing their own contribution and choosing funds that they believe make the most sense for their goals rather than focusing more than necessary on choosing the best fund based on growth, each year. It would be smart for investors such as you and I, to do the same. Good investing is rarely exciting but it gets the job done far better than chasing exciting returns would.
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