Ramesh is new to the world of investing. His friends explained him about the benefits of investing in mutual funds and he decided to invest in one to understand all the fuss around it. He approached a financial advisor and asked him, “My friends have told me about these particular mutual fund schemes that fetch around 40 to 50% returns in one year. So does that mean that if I invest a lumpsum of Rs 2 lacs into such funds providing 40-50% returns, I would accumulate around Rs 2.8 to Rs 3.2 lacs in a span of 1 year?”
This is a quite common blunder investors makes when it comes to evaluating investing in a particular mutual fund scheme. Since a long time, past performance has become an important criterion in choosing the right funds for your investment portfolio. However, investors should be mindful that the performance of a mutual fund varies each year and may not be the same the next year. It is based on the performance of the markets in general and especially on the investment decisions and choices made by the fund manager.
As an investor, you must not be swayed and influenced by the short-term performance of a mutual fund scheme and select it solely on that basis. Experts and mutual fund advisors advise investors to evaluate at least 5 year track record of a fund before finalising with the right scheme for their portfolio.
Looking at a minimum of 5-year track record helps you to get a fair idea by understanding the performance of the fund at its highest and its lowest. Equity funds are best suited for an investor’s financial goals and objectives with an investment horizon of at least 5 to 10 years.
Equity mutual funds are known for their volatility. Thus, you cannot be sure that your investment amount of Rs 2 lac will grow into Rs 2.8 lacs in 12 months just because there was a 40 to 50% returns in the last year. Your growth of mutual fund investments could be 10%, 20%, 40%, or even negative in a year. However, historically, equity funds tend to average out their returns over a long period of time, at a rate much higher than the rate of inflation. This is what is meant by volatility.
Over the long run, equity funds have proved to provide returns of over 14 to 16% when invested for a long duration, say five to seven years. This is rate of return for equity funds that you should consider while planning to invest in mutual funds. Longer returns are more indicative of the strength and stability of mutual funds that you choose to invest in.
You can either invest a lumpsum in mutual funds or go the SIP (Systematic Investment Plan) way. You can always take the help of a mutual fund expert who can guide you in your investment journey. Happy investing!