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Understanding "Reasonable Returns" In Investing

Having a reasonable expectation of returns is the most important principle of successful investing. It helps you choose the right investment options and stay the course with your decisions.

One of the things that most first time investors find difficult to accept is that there are no assured returns in mutual funds. Then there are other investors who enter mutual funds with expectations of fabulous returns - having heard stories of people doubling their money in 2 years or faster. Both can lead to disappointment.

Having a reasonable expectation of returns is the most important principle of successful investing. It helps you choose the right investment options and stay the course with your decisions.

The reasonable return on Equity Funds

Smart investors understand that equity fund returns over a long period average to 14%-16%. They don't expect to double their money in two years. They know that it takes time (5-10 years) for that return to be realised.

They understand that equity fund returns are not guaranteed. That there will be periods where your return would be negative, as well as periods where the return would be dramatically high. But this will average out over time, and that long-term historical average of inflation-beating 14%-16% return is their goal.

The reasonable return on Debt Funds

Smart investors, also know not to expect fantastic returns from debt funds. They know that debt fund returns are not fixed. That even in debt funds you may have periods of low (even negative) and high returns.

While both kinds of funds have some amount of fluctuation, the frequency and scale of fluctuation is far lower in case of debt funds and averages out over a shorter period - a few months to a year - compared to equity funds where the fluctuations are larger and take much longer (5-10 years) to get to average.

Smart investors know that, for the reasons stated above, short term goals are best met with debt funds and long term ones with equity funds.

Smart investors don't try for exceptionally high returns in just a few years because they know that the effect of compounding doesn't kick in in less than 5 years. The table below shows this. The difference in accumulated amount is very small for different rates of return in the short term.

Smart Investors allocate their money with a full understanding of the amount (percentage) and nature (fluctuation) of returns.

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