Readers often ask us, “What return can I expect if I invest via SIP in an equity mutual fund for 10 years?”.
The honest answer to “What return can I expect from a 10-year equity MF SIP?”, is “no idea”. We have discussed this at length before Do not expect returns from mutual fund SIPs! Do this instead! Here is an updated graph relevant to the reader’s question.
Each dot in the graph below is a return from a 10-year SIP. Notice that it can just about be anything. If the markets crash, so do SIP returns. If the markets recover, so do SIP returns.
You can expect 10%, 12%, or 15%, but the market will give you what it wants.
So what is the solution?
So one cannot expect any return, but then what is the solution? First, let us clarify that a bit. One should not expect any return if the idea is to simply buy units and live in hope. As shown before – How to reduce risk in an investment portfolio, no matter what the sequence of returns is (which is the reason for the return variations), one can, with a clear asset allocation plan and stepwise reduction of equity can help us reach a target corpus.
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So the solution is to replace target return (= expectation) with a target corpus. This is possible only when we are clear about the purpose of the investment. You can use the Freefincal Robo Advisory Tool and create a concise plan for each goal.
Take the case of the 10-year goal. We can use 10% before tax or 9% after-tax returns from equity. However, we should not expect our portfolios to grow at that rate. First of all, 100% equity investment is a mistake. The risk is too high because the swing in the possible returns is too high.
The robo tool recommends an initial asset allocation of 30% equity and 70%. This might seem “too conservative” to many. However, by adding more equity we are only adding more risk, not more reward.
Also, a 10Y goal will not always remain a 10Y goal. Before you know it, there will only be 5-6Y left and in any case, the equity allocation has to be reduced. If at this time, the returns are poor, the overall portfolio return will be lower than expected and the time lost is lost forever (we cannot go back in time and invest more). See: Equity may beat inflation but that doesn’t mean you will!
So moderate equity exposure to begin with plus gradually tapering will greatly increase the chances of getting close to our target corpus with lower portfolio volatility. This is the asset allocation plan auto-generated by the robo tool.
The main advantage with variable asset allocation is our focus shifts from some set return target to the target corpus. We don’t need to worry about news and events that affect market returns.
In summary, we recommend the reader first appreciate the importance of asset allocation and include a substantial amount of debt (fixed income) in the portfolio and then consider an equity de-risking plan as indicated above. To get started from scratch, explore our online course on goal-based portfolio management.
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About The Author
Dr M Pattabiraman giving a lecture
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 14 years of experience publishing news analysis, research and financial product development. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.
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Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (Published by CNBC TV18) for DIY investors.
This book helps you ask the right questions and find the right answers. It also includes nine online calculators to create custom solutions.
(2) Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want.
This book helps young earners get the basics right from the start! It will also help you travel to exotic places at a low cost!
(3) Chinchu Gets a Superpower! for kids.
Both the boy and girl versions of "Chinchu Gets a Superpower".
Most investor problems stem from a lack of poor decision-making. We made bad decisions and money mistakes when we started earning, and we spent years undoing them. Why should our children go through the same pain?
What is this book about? As parents, what if we had to groom one ability in our children that matters not only for money management and investing but for every aspect of life? My answer: Sound decision-making. So, in this book, we meet Chinchu, who is about to turn 10. The story follows what he wants for his birthday and how his parents plan it, while also teaching him key ideas about decision-making and money management.
What readers say!
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 a young age. The importance of money management and decision-making based on their wants and needs. Very nicely written in simple terms. - Arun.
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