Equity Mutual Fund Investing: What to expect when you are expecting!

Published: June 25, 2015 at 8:41 am

Last Updated on April 5, 2016 at 5:35 pm

While recommending equity as an asset class or equity mutual funds as an instrument suitable for newbies, illustrations about the power of compounding, past returns and how they have comfortably beat inflation are typically used.

This is followed by caveats (besides past performance disclaimers)  that the investor must

  • be ready to stomach the ups and downs of the market,
  • ride the course,
  • stay invested no matter what,
  • get used to volatility etc.

These caveats are typically not quantified. Even if done  (as attempted here in the past), they do not help in preparing in the investor for the journey ahead as much as they should.

In the post, which I would like treat as the second part of Asset allocation for long-term goalslet us discuss about ‘what to expect’ when you invest in equity mutual funds. 

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

There are two aspects to investing in volatile securities:

1) ‘How’ to expect:  For the investment period I have in mind, how much could returns vary? How can I quantify this?

This is of course based on backtesting. While the future is  unknown, quantifying past volatility tells me that I should expect at least that much fluctuations in return in the future.

This was earlier covered for debt mutual funds:

Debt Mutual Fund Returns: How to expect when you are expecting!

and equity mutual funds in two parts*:

How much can I expect from equity as an asset class for long-term goals? Part 1

How much can I expect from equity as an asset class for long-term goals? Part 2

(*) link titles are different from post titles to avoid confusion.

2) ‘What’ to expect:

‘How to expect’ helps me conclude that for the investment period I have in mind, the return could be anything between: (R-X) to (R+X).

Where X is a suitable volatility measure (typically standard deviation).

However, it does not give me an idea of how much my portfolio will drop in value for a particular asset class or for a particular asset allocation.

Let us try and address this now.

We shall consider the same portfolio used in Asset allocation for long-term goals

Franklin Indian Blue Chip as representative of equity and Franklin Indian Income fund as representative as debt.  These are among the oldest equity and debt funds in the market.

This is how the NAV movement for each fund looks like


The data is from 5th March 1997 to 5th May 2014.

We will now calculate a metric known as maximum drawdown.

This simply refers to the maximum percentage fall  from a peak for a given time period.

For the above mentioned period, a portfolio that has 100% equity would have experienced a maximum drawdown of 74.6%

How many young investors who claim to have ‘high risk appetite’ could have endured such a fall? Talk, like backtesting, is easy!

A 100% debt portfolio would have experienced a max. drawdown of only about 6%.

Now the max. drawdown for different asset allocations.


The black line is for reference. It is a y=x line.

Investors with 60% to 90% equity allocation suffered a max drawdown of 60-70%. I think it is not a bad idea at all to expect such a huge drawdown to occur at least once during the investment duration.

For 30% to 60% equity allocation, investors suffered a max drawdown a little more than their actual allocation.

That is, an investor with 40% equity allocation suffered a max drawdown of  little more than 40%.

Portfolios with 10-30% equity allocation had surprisingly large max. drawdowns.

What is the point of this post?

1) If you have decent amounts of equity exposure for your long term goals (which you must), pay attention to this bit advice from the legendary Bette Davis (24  seconds video)

2) To be forewarned is to be forearmed. In this case, we go one step further and embrace the volatility and welcome a market crash. SIP investors will be able to buy more units automatically. Those who have been stashing cash can mobilize it.

A huge drawdown is a necessary evil.

No other asset class, not gold, not real estate, not fixed income, offers you such wonderful opportunities to profit from, every few years.

Here’s hoping we make the most of it.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => 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.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • 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 over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr 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!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
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
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished 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 Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis 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

Travel-Training-Kit-Cover-new 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)