“How much returns to expect from mutual funds” is every investor’s question. A lot of popular media stories bait you with stories of Top 5 or Top 10 best mutual funds, highest performing mutual funds. Beware. These lists based on mutual fund returns, if followed blindly, can do more harm than good.
Today, I am sharing with you two of my earlier notes which focus on what returns to expect from mutual funds and how your biases affect you in determining this number.
We develop good habits and thinking when we repeat the process, n times. So, go ahead and strengthen your own mental framework about returns, inflation and biases.
Returns from Mutual Funds
As an investor, you invest in mutual funds to earn a higher return than your other investments. The benchmark that you use is of past returns and hence your expectations are also high. For some, they are not sure what to expect.
Let’s try and use a data based approach to determine these expectations.
So, what returns do you expect from your mutual funds?
Actually, it depends on what kind of a mutual fund you invest in.
Mutual Fund Returns and your Bias
In a recent email exchange with a Unovestor, I was persuading him to consider more reasonable returns from his investments. His comments:
If I cannot expect even 15 to 18% returns from equity or mutual funds then what is the point of investing in them.
Even real estate investment held over long periods of time can give 15% returns.
Now, there are certain issues with this line of thinking.
The behavioural experts have defined a good list of cognitive biases that influence our thought process and this argument was no exception.
In this particular case, there are 2 clear biases that stand out. There is yet another one, that I add.
There is one enemy of your money that we conveniently forget or underestimate – INFLATION. More than anything else, you need to keep an eye on that.
What is your personal inflation rate? How much returns are you expecting from your investments?