It is clear from how many readers, particularly young earners, respond to freefincal content these days that they are overconfident about their equity investments. Especially investments in small cap funds, mid cap funds, etc., that have soared in recent months. This could spell trouble for their goals and dreams.
I hate to break it to you, but there is no proof that long-term equity investing will always give you “good returns”. All those arguments about the economy growing and the equity market reflecting those returns are mere opinions peddled by product manufacturers and their associates, fanned by influencers and heightened to legend by naive and lazy investors.
Yes, equity offers a more than reasonable chance of beating inflation (not matching your expected return), but that does not mean it always will. Here is our research:
- Long-term investing in equity comes with no guarantees of success!
- The stock market always moves up in the long term, but returns move up and down!
- Equity may beat inflation, but that doesn’t mean you will!
- Why should I invest in equity mutual funds when there is no guarantee of returns?
Before continuing, I would like to clarify that we are not against equity investing (close to 65% of my family’s net worth is in equity, and more than 85% is market-linked, thanks to mandatory NPS). We are only trying to caution against overconfidence in equity.
So many people today assume their excellent returns will never drop. If there is something that we can be sure of about the equity market, it is good times will end – My retirement equity MF portfolio return is 2.75% after 12 years!
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Sharp drops are usually preceded or succeeded by sharp highs due to an idea called volatility bunching. Read more: Timing the market will work but not how we imagined! The bigger problem is years of sideways markets.
This can happen due to economic slowdown, uncertain political climates, war, etc. We had such a “lost decade” in the nineties. In that decade, we did not have a stable government besides our economic difficulties (India was recovering from the brink of bankruptcy).
Can you be sure you will never encounter political uncertainty and poor economic growth in your investment journey?
There may be broad correspondence between economic growth and equity markets, but that does not mean it would be your specific experience. Besides, as the economy develops, equity markets become more stable, less volatile, and less rewarding. We already have enough evidence: Sensex at 50,000: lessons from the 42-year journey.
And what makes it worse is that many of the long-term returns of the past stories are based on just a few years! See: 44-year Sensex return is 17%, but half came from just four years!
As for the great small cap funds, there is no evidence investing in these will always get you spectacular returns. Is there any proof small cap mutual funds would outperform in the long term?
We do not have enough history of small cap funds, and whatever little we have, before 2018, when the SEBI MF categorization rules kicked in, many of these small cap funds held significant chunks of mid cap stocks. So, the long term returns of these funds are partly due to mid cap stocks —more about this in a detailed article. Also, see Nifty vs. Nifty Next 50 vs. Nifty Midcap 150 vs. Nifty Smallcap 250.
Being overconfident about the equity markets is probably among the worst investing mistakes we can commit. Equity is like fire. Fire is indispensable to our lives, but getting comfy and fooling around with it would burn you.
If there is one statement that we should take seriously about mutual funds, it is their disclaimer:
“A mutual fund scheme is NOT a DEPOSIT product and is not an obligation of, or guaranteed, or insured by the mutual fund or its AMC. Due to the nature of the underlying investments, the returns or the potential returns of a mutual fund product cannot be guaranteed. Historical performance, when presented, is purely for reference purposes and is not a guarantee of future results. Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully”. – Source: AMFI
While our long term goals require a good chunk of equity, our planning also needs a good dose of safety – reasonable inflation estimates, low return expectations from equity, asset allocation, diversification and an efficient de-risking strategy to achieve our goals regardless of future market conditions.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)