Do not Expect Positive Returns from Equity Mutual Funds every year

Yesterday, I got a call from my client. He started investing in equity funds for the first time last year. He invested 10,000 per month for 12 months in L&T Midcap fund. His invested amount is 1.2 Lakhs, but the present value is 1.17 Lakhs. A loss of around 2500 in 12 months!

How can my fund value less than the amount invested? Other Large cap funds have given positive returns in the same period. Had I invested it in recurring deposit, it would have been better?

Sometimes, I think, investment is similar to life – with many ups and downs. You choose the way to move forward, choose a path and reach your destination.

Same is the situation with your investments-

• You choose a way to invest, it may be SIP or lump sum.
• Then you decide your path, it may be stocks, mutual funds, FD, RD etc.
• Ultimately that path leads to your destination, in financial terms, it is your goal.

Sooner or later, everyone reaches their destination, if the person is determined to do so.

If you choose to tread a smooth path, the journey may be smooth, but it will take more time to reach your destination.  If you choose to invest in debt instruments like FD, your journey would be without up and downs, but it will take longer time to reach your goals.

But if you choose to tread a bit risky path, the journey may not be smooth, but it will take less time to reach your destination. If you choose to invest in equity instruments like equity mutual funds, your journey would have a lot of ups and downs, but you will reach your goals faster.

Also Read: Asset Allocation- By Age, Returns or CRATON

Now coming back to the point, what are those ups and downs in equity mutual funds investments? Everyone asks you to understand the power of compounding in mutual funds. But compounding works in a different way in mutual funds. It is not like FD, where you will get positive returns every year. You should never expect positive returns from equity mutual funds every year. Let me explain it with an example.

Suppose you invest Rs. 1, 00,000 in FD at 7% returns for 1 year and keep renewing it for 5 years.

Returns in FD

The value of Rs. 1,00,000 would be Rs. 1,07,000 after one year, Rs. 1,14,490 after 2 years, Rs, 1,22,504 after 3 years, Rs. 1,31,079 after 4 years and Rs. 1,40,255 after 5 years

Returns in Mutual Funds

Now if you invest same amount of Rs. 1, 00,000 in equity mutual funds for 5 years when the market was a little bumpy.

1^st years Returns – Negative 5%

2^nd Year Returns – 15%

3^rd Year Returns – 14%

4^th Year Returns -Negative 3%

5^th Year Returns – 20%

So, what would be your value of investments?

After 1 year- Rs. 95,000

2^nd Year – Rs. 1, 09,250

3^rd Year – Rs. 1, 24,545

4^th Year – Rs. 1, 20,808

5^th Year – Rs. 1, 44,970.

So, the returns in equity mutual funds were never smooth but it is giving better returns than FD. There were negative returns in 2 out of 5 years, still the returns are better than FD.

You should not invest in equity mutual funds if your goals are just 5 years. The above example was just to show the up and down movements in equity mutual funds.

Now let us take the funds which are there in the market for last 20 years and check the year on year performance.

Aditya Birla Sun Life Equity Fund – 20 Years Performance

Aditya Birla Sun Life Equity Fund which is a multicap fund has given a CAGR of 17% in the last 20 years, but the returns are not liner. Out of 20 years, it has given negative returns in 7 years.

Let us see how the SIP of Rs. 2,000 per month from April 1999 has grown in the last 20 years.

The YoY returns are negative for the 2^nd, 3^rd and 4^th Year in a row -51%,-8% and -5%, still the CAGR is just -1% negative because the fund had given a stellar performance in the first year.

YoY returns calculation – This Year Fund Value – (Last Year Fund Value+ This year investment (24000))/Last Year Fund Value.

You will always have up and down movements in mutual funds, this point should always be kept in mind before investing in mutual funds. I have personally seen the portfolio falling by around 50% in 2008. The volatility will be higher in Midcaps and much higher in small caps.

I always suggest that do not invest in equity mutual funds if your goals are nearer. Suppose in this case, if you had invested in this fund for a goal which was just 4 years away. You would not have received your capital back.

One more point before I finish this article, it is always advisable to review your funds. This fund may have given returns in the long term but there are funds, which after performing for 1-2 years, will give you bad returns constantly.

“When you realize your life isn’t heading in the direction you wish, rather than wasting time complaining about the situation, just focus on the direction you wish to proceed with determination.”

― Nanette Mathews

So, take your mutual funds investments as your life journey where the path is never smooth. Some years may be good and some may be bad. If the bad moments are continuously dragging you for some years, change your directions after review. In financial terms, change your fund only if it is not performing in line with the benchmark & peer funds. Otherwise remain calm.

Keep Investing and Happy Investing.