After 10 years my equity return is 9% – Yay! Here is why I am not worried

Published: October 30, 2018 at 9:49 am

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Yes, that is right!  After 10 years of investing, my equity return is 9%, well 9.46% to be exact. But I am not worried, and I hope you are not too. Here are some takeaways from this journey and a comparison of my retirement equity portfolio with Nifty Next 50 and the Nifty Blend Index (50% Nifty 50 + 50% Nifty Next 50). There are two key reasons why I am posting this. (1) There is a misconception among investors that returns from equity will initially fluctuate a lot and then stabilize. No, it will fluctuate all the time. (2) Investors tend to focus too much on the return and take the internal rate of return (XIRR) way too seriously. This is not only wrong but also unhealthy.

I use the freefincal mutual fund and financial goal tracker to track my portfolio, but I never enter transactions until I feel the need to check the asset allocation and perhaps rebalance. So the last time I did this was on the ten anniversary of my mutual fund journey in June 2018: Ten Years of Mutual Fund Investing: My Journey and lessons learned and had to do it again before writing this: Don’t miss this opportunity to increase equity by rebalancing your portfolio!

So when I computed the XIRR of my equity portfolio, that is over every transaction that was done in the last 10Y, including dividends and including full sold mutual funds and found it be 9.46%, naturally, I was surprised and naturally disappointed (hey I am human too, although seem to disagree), but I soon realised that there is nothing to worry about and in fact, this is the best time to invest more in equity (unfortunately,  I do not any excess cash to do so).

The fall in overall return is quite significant: From ~ 17% last December during the annual audit dropping down to early teens this year and a healthy 13-14% in June it has now fallen to 9.34%. If you are going to pay too much attention to the returns, then I suggest that you mentally prepare yourself for such ups and downs. A better method is a proper goal-based approach and portfolio analysis so that you can look well beyond returns.

Before we look at the portfolio graphs, consider this: As on date (and things can change), in spite of the recent market slump/ fall, my equity portfolio has only fallen by about 5-6%. This is trivial to what it has been through earlier! My financial independence target of 30 times current annual expenses (including my NPS holding) is still intact. All I need to do is to keep investing as usual. What is there to worry about? If tomorrow, the winds change direction and the market moves up, that 9% return will quickly become 15%ish in a matter of days.

So there is not much point focussing on returns. Investors also fail to understand that poor returns do not come because of losses alone. The major contributor is time. If the portfolio takes too long to move and just keeps moving up and down, then returns will fall. The best example is: How can a 400% profit result only in 8% return?! This, I believe, is what has happened to my portfolio.

The growth has dropped and since the clock never stops ticking, the returns will take a hit. C’est la vie. Now, let us get to the portfolio charts. I have used the Mutual Fund Portfolio Growth Visualizer With Index Benchmarking tool to create these charts (except the Nifty blend one as it was manually inserted). Kindly note, the only purpose is highlight associated risk. I am not trying to flaunt my portfolio. After all, remember my return after 10 years is only 9%. So it is more than likely that I am a terrible investor. One more reason not to ask me for investment advice.

After 10 years my equity return is 9% - Yay! Here is why I am not worried

After 10 years my equity return is 9%

My current equity portfolio approximately has equal exposure among Quantum Long Term Equity; Parag Parikh Long Term Value Fund and HDFC Hybrid (previously Balanced) Fund.

Their Returns in Dec 2017:

  • Parag Parikh Long Term Value Fund~ 19%;
  • HDFC Balanced ~ 18%;
  • Quantum Long Term Equity ~ 15%
  • NPS Tier 1 (mandatory; 15% equity): ~ 10% (this is my fixed income portfolio with a small exposure to PPF)

Their Returns as on Oct 29th 2018: 

  • Parag Parikh Long Term Value Fund~ 13%;
  • HDFC Balanced + HDFC hybrid (combined*) ~ 11.2%;
  • Quantum Long Term Equity ~ 8.23% (so this has probably pulled down the returns the most, but also ensure the overall fall was small)
  • NPS Tier 1 (mandatory; 15% equity): 8.63%

* You can use my fund tracker to consolidate holding for funds like HDFC Balanced and HDFC Hybrid and get the full return. Or you can DIY: Mutual Fund Mergers: how to track investments, calculate returns and pay capital gains tax post-merger

Gain or loss in the retirement equity portfolio since inception

Notice that for more than 5Y after my first investment, the gain was zero. Then see how quickly it moved up. That is the way equity will work. If you have read the Are you ready to climb the Sensex Staircase?! post, you will notice the steps there The first step was up Dec. 2013. The second was in 2015 and much of 2016 and now the third step has started from Jan 2018 (of course with the benefit of hindsight)

Gain or loss in the retirement equity portfolio since inception

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This is why I keep saying, invest, invest, invest, when your portfolio is staying on one step.

Retirement equity portfolio vs Nifty Next 50

With the portfolio visualization tool, you can choose any index and put the same money as you did in your portfolio on the same dates and compare growth. When I did this for the first time in Dec for the audit, I got comments like, ” does this not mean NN50 is better?” (because it had a higher value at that time). So what will you say now?

Retirement equity portfolio vs Nifty Next 50

That my portfolio is better? Time to grow up, please! Some things will look shiny when the market is up and other things when the market is down. If you do not have any conviction in your choices, you will be searching for that “best place to invest” all your life. If you want to be a DIY investor, you better be obstinate and pig-headed. Being open-minded will let garbage like this post in.

Retirement portfolio value divided by total investment

Notice how this lingered around “1” (zero gain) as mentioned above, then it moved up to “1.5”, stayed then, went up to “2” and then quickly fell down. I briefly doubled my investment 🙂 But since I keep putting in money, this is a tough ask. My investment CAGR (the rate at which my investment amount grows) is about 10% now and I strongly recommend you worry about this CAGR and not that from your funds.

Retirement portfolio value divided by total investment

Retirement portfolio minus Nifty Next 50

So this is the gain or loss with respect to the NN50. Notice that it pretty underperformed at all times, except during this fall (when you need it to outperform the most?)

Retirement portfolio minus Nifty Next 50

Retirement equity portfolio vs Nifty Blend (50% Nifty 50 + 50% Nifty Next 50)

The nifty blend index was introduced in this post: Can I start Index investing with 50% Nifty 50 and 50% Nifty Next 50? My portfolio has fairly outperformed the blend index.

Retirement equity portfolio vs Nifty Blend (50% Nifty 50 + 50% Nifty Next 50)

Someone one said, 50% of Nifty Next 50 is too less for me. I want 100% NN50. Yeah, and you will get 100% of its fall too. God grant me patience to ignore stupidy and the wisdom to block those who display it

Retirement portfolio minus Nifty Blend (50% Nifty 50 + 50% Nifty Next 50)

Retirement portfolio minus Nifty Blend (50% Nifty 50 + 50% Nifty Next 50)

I think that is decent outperformance. At least for the time being, I (personally speaking that is) don’t see a need to shift to index funds. Well, much of it is due to inertia, anyway.

So, that is why I am not worried and am eager to invest more. How about you? Have you checked your portfolio against an index (properly!, not just look at the returns that you see online)

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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5 Comments

  1. Sir , In recent fall , I am also adjusting my portfolio and i am sure most of us are . But I also know that there are many people who are buying and advising to buy in this corrected market to get long term benefit . If I take a step back and look at the market , Nifty PE is 25 with P/B 3.5 ; Nifty next 50 PF is 38 with P/B 3.7 . It is still very expensive market . Should we be more cautious in balancing portfolio ?

  2. Pattu,

    Can you build can calculator, or point to one if you know exists already which compares under/over-diversification from my portfolio?

    Say, I have A, B and C funds with x%, y% and z% allocation. I can check their overlap and it’s small. But I wonder if their collective exposure almost mimics index. If yes, I may be paying fee for nothing. I tried to do this looking at fund fact sheet from VR but (1) it only shows top 60-70% of holdings not full 100% (2) stock names used in fund factsheet don’t match NIFTY500 (which I choose to represent broad market index) constituents as due to “Ltd.” or spelling or vairation of name.

    So, do you think it will be useful to have this tool?

  3. Pattu Sir,
    1. What if instead of actually investing regularly in equity funds, you had just made a notional entry into your tracker and instead invested in a liquid/money-market fund.
    2. Then when ever your notional folio’s returns dip in a market correction (every 3-5 years) you move a chunk from your liquid/money-market fund to your target equity funds.
    3. Wouldn’t this strategy be deterministically better than the existing strategy, and has minimal overheads.

  4. What are the criteria you follow personally to call one a financially independent individual?
    You mentioned 30 times the annual expenses? Is there anything else You would suggest?

  5. Sir, would like to share my case –
    I started 40 months back say May 2015. Suppose I am able to set aside Rs 100 for doing SIP + I also had another saving of 4000 Rs in bank FD @7%.
    I religiously do a SIP for 40 months investing 100 Rs every month for 40 months. (4000 Rs) – In addition to FD which I did not touch..
    Then, the amount in Bank (Principal + interest@7%) = What market returned from May 2015 to Oct 31st. – on Oct 31st.

    I understand 3.5 year window is not that long.. also I did not do lump-investment 40 months back.

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