Answers to a frequently asked questions on investment returns.

## 1. What return does the moneycontrol portfolio manager calculate?

It calculates the absolute return. That is the percentage difference = (value-investment)/investment.

This *does not * represent how your money has compounded. Ignore it. Use Value Research portfolio manager to get XIRR returns (a measure of compounding when there are multiple investments) or my portfolio tracker (link on the right) for mutual funds which would allow you to continuously track financial goals.

## 2. What return does Value Research use in its fund listings?

Returns less than 1 year are absolute returns. Above 1 year, annualized returns (CAGR) are listed.

## 3. How can I calculate XIRR for my mutual fund or stock holdings?

You will need to enter *every transaction ever made! *So collect that information and use this simple **XIRR calculator**.

## 4. How much return can I expect from my equity investments over the long-term?

In the investor workshops, I show that over a 15 year period, the *average * return is about 14% but with an error (standard deviation) of 4%. So 68 times out of 100, returns can swing from (14-4 = 10%) to (14+4 = 18%). Which is why I plan all my long-term goals with 10% equity only. You are free to choose whatever number you want, but be mindful of the volatility.

Note to those who understand what a normal distribution is: so far, Sensex returns can be reasonably approximated with a normal distribution. Hence, the notions of standard deviation and average are still valid … so far.

## 5. What return should I use in a financial goal calculator?

What is your debt allocation? What is your equity allocation? ….. (for other asset classes)

What post-tax return do you expect from each asset class?

If I expect 6% post-tax return from debt (40% allocation) and 10% post-tax return from equity (60% allocation), the *approximate *return to be used in the goal calculator =

(6% x 40%) + (10% x 60%) = 8.4%.

Do not make the mistake of using only equity returns!!

## 6. Do I include the tax saved while calculating returns from ELSS funds, PPF etc.?

NO! What you save matters little to your net worth, unless you invest it!. If you do invest it, it is going to be factored in any way.

## 7. What is the difference between, CAGR, IRR and XIRR?

Please see: **Compounding With Volatile Returns: CAGR vs. IRR**

## 8. How do I make sense of volatility in returns? (Not a FAQ. It should be!)

Have written several posts on this. A short selection:

**Debt Mutual Fund Returns: How to expect when you are expecting!****Evaluating Volatility in Returns****Understanding Volatility of Investment Returns with a Portfolio Rebalancing Simulator****How to select mutual fund categories suitable for your financial goals****How to Select Debt Mutual Funds Suitable For Your Financial Goals?**

**#~#~#~#~#~#~#~#~#~#~#~#**

**I draw a blank here. Can you add to this list? If you have questions on investment returns, ask away. I will do my best to answer them.**

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Any fee based financial planner in chennai sir? Kindly help me.I require a comprehensive plan for myself and my dad who is 62 years old.

There are several fee-based planners (who sell plans and distribute products). I do not recommend anyone here other than the fee-only (only sell plans).

Any fee based financial planner in chennai sir? Kindly help me.I require a comprehensive plan for myself and my dad who is 62 years old.

There are several fee-based planners (who sell plans and distribute products). I do not recommend anyone here other than the fee-only (only sell plans).

I have a suggestion to add a sub-question for 4

4a) What kind of a return can I expect from equity mutual funds in 1 month/6 months/1 year/2 years….

In simpler terms, for periods less than 15 years, the average return is higher than 14%; *however* the standard deviation is also much, much higher. In other words, you can get a year like 2014, and you can also get a year like 2008!

For a more detailed description of this, one can look at this link from HDFC AMC: http://www.hdfcfund.com/Calculators/SensexRollingReturnsCalculator.aspx?ReportID=C208C983-C4A5-41B4-B245-CB77C8D2EDC3 (just as a sample…)

Yes, I am aware of thiis link. When the standard deviation is much larger than the average, the average is meaningless. So the answer to your question is, stay away from equity for such durations.

I have a suggestion to add a sub-question for 4

4a) What kind of a return can I expect from equity mutual funds in 1 month/6 months/1 year/2 years….

In simpler terms, for periods less than 15 years, the average return is higher than 14%; *however* the standard deviation is also much, much higher. In other words, you can get a year like 2014, and you can also get a year like 2008!

For a more detailed description of this, one can look at this link from HDFC AMC: http://www.hdfcfund.com/Calculators/SensexRollingReturnsCalculator.aspx?ReportID=C208C983-C4A5-41B4-B245-CB77C8D2EDC3 (just as a sample…)

Yes, I am aware of thiis link. When the standard deviation is much larger than the average, the average is meaningless. So the answer to your question is, stay away from equity for such durations.

Dear Pattu,

Thanks again for this article and also the previous article on reviewing your mutual fund portfolio.

My concern with the returns expectation is that, if I tend to be pessimistic and use 10% as the Expected Equity growth for my portfolio, and have 10% Inflation Rate then the net growth on my portfolio effectively reduces to zero, at least on excel. This does not provide wealth creation ( again on excel ) by investing in Equities. I feel that is not true as inherently I believe that sensible Equity Investing is my only hope to a relatively secure future. If this is not the case, then what is the point of investing in Equities.

Now I have multiple questions:

1. Is such a pessimistic Equity return meaningful, as it robs me of almost all my financial goals. I do require at least a 4-5% real rate of return if I wish to meaningfully reach my financial goals ?

2. Neo investors like me will run away from Equities, if that is all the expected rate of return that is advertised, and that is not good for the future of equities or for that matter future of an individual ?

Please advise, how to find a balance, and identify a "motivating" and a "meaningful" real rate of return in the current Indian markets.

Dear Pattu,

Thanks again for this article and also the previous article on reviewing your mutual fund portfolio.

My concern with the returns expectation is that, if I tend to be pessimistic and use 10% as the Expected Equity growth for my portfolio, and have 10% Inflation Rate then the net growth on my portfolio effectively reduces to zero, at least on excel. This does not provide wealth creation ( again on excel ) by investing in Equities. I feel that is not true as inherently I believe that sensible Equity Investing is my only hope to a relatively secure future. If this is not the case, then what is the point of investing in Equities.

Now I have multiple questions:

1. Is such a pessimistic Equity return meaningful, as it robs me of almost all my financial goals. I do require at least a 4-5% real rate of return if I wish to meaningfully reach my financial goals ?

2. Neo investors like me will run away from Equities, if that is all the expected rate of return that is advertised, and that is not good for the future of equities or for that matter future of an individual ?

Please advise, how to find a balance, and identify a "motivating" and a "meaningful" real rate of return in the current Indian markets.

Thank you.

If you expect less, you invest more. That is the secret to wealth creation along with of course the time of investment.

Look at how much equity returns can fluctuate and make up your own mind. Dont take pessimists like me seriously

The key to financial wealth is to understand the importance of productive assets (which you do) and to increase investments as income increases. We will let the markets do the rest.

Thank you.

If you expect less, you invest more. That is the secret to wealth creation along with of course the time of investment.

Look at how much equity returns can fluctuate and make up your own mind. Dont take pessimists like me seriously

The key to financial wealth is to understand the importance of productive assets (which you do) and to increase investments as income increases. We will let the markets do the rest.

Liked 5th point. It is true that many times, we simply calculate 10% returns on all our investments. How conveniently we forget that 30-50% of the money is in debt which will give 6-8% post tax.

Yes, common ,mistake. thanks.

Liked 5th point. It is true that many times, we simply calculate 10% returns on all our investments. How conveniently we forget that 30-50% of the money is in debt which will give 6-8% post tax.

Yes, common ,mistake. thanks.

Hi Pattu

How about XIRR given in CAMS portfolio report? Should we consider it reliable?

As long as it says XIRR, it is reliable.

Hi Pattu

How about XIRR given in CAMS portfolio report? Should we consider it reliable?

As long as it says XIRR, it is reliable.

Hi.

A 10% return from equity over a long term is very pessimistic. If one is investing for a 10 / 15 /20year period, to be realistic, one need to really look back the returns provided by equity at different points. A SIP investor should look at sip based investing of past returns and fix a return expectations. I am a NRI and even a fixed deposit till few months back provided 9.5% tax free return for a 10year period. If I go by your pessimistic view, 9.5% guaranteed is a fantastic return for this period, which is not the case. If the FD rates are so high, equity over the same period will also provide better return although it is not guarnateed. Infact, an analysis of 10year time frame from 1996 in good equity mf provided superiod returns than any other investment (certainly above the 10% returns).

Ajay

Hi.

A 10% return from equity over a long term is very pessimistic. If one is investing for a 10 / 15 /20year period, to be realistic, one need to really look back the returns provided by equity at different points. A SIP investor should look at sip based investing of past returns and fix a return expectations. I am a NRI and even a fixed deposit till few months back provided 9.5% tax free return for a 10year period. If I go by your pessimistic view, 9.5% guaranteed is a fantastic return for this period, which is not the case. If the FD rates are so high, equity over the same period will also provide better return although it is not guarnateed. Infact, an analysis of 10year time frame from 1996 in good equity mf provided superiod returns than any other investment (certainly above the 10% returns).

Ajay