Here are some examples of the risk and reward associated with equity mutual fund investing using the twenty year NAV history of Franklin Blue Chip Fund (a large cap fund) and Franklin India Prima Fund (mid, small-cap funds). I had compared these funds a few years back, but I think a re-visit will not hurt.
NAV data from 17th Dec 1993 and 23rd June 2017 was considered to compute rolling returns. In this interval, almost 800 20-year return computations are possible. Each blue dot and red dot in the picture below is a 20-year return.
Now, what I should I look at in this graph?
- Shall I notice that Franklin Prima has pretty much always beat Franklin Blue Chip for all the 20-year interval considered and shift my equity portfolio to entirely mid/small-cap funds?
- Or shall notice that all red and blue dots are above 15% and expect the same kind of return over the next 20 years?
- Or should I look at the horizontal axis and realise, even though each fund has ~800+ 20Y returns data, the investment window is only from late 1993 to late 1997 – a mere five-year window. Is this enough data?
Now let us invert the stats: make the rolling return duration as 5 years and the investment window as 20 years. This produces a whopping ~4600 entries for each fund.
- Should I now look at the increase in the spread of returns? What was only ~5% for each fund over 20Y, has not become ~60-70% for each fund. The best quality about a rolling returns graph is its ability to display risk even though only returns are plotted.
- There are those in the mutual fund industry who consider 2-3Y as “long-term”. If 5Y long-term? Do mutual funds beat 5Y fixed deposits or even savings bank accounts at all times?
What about 10Y rolling returns?
- Can I now look at these 3200+ 10Y returns and assume that I can expect at least 10% in the next 10 years?
- Can anything be inferred from the spread of about 30% for the large cap fund and about 40% for the mid-cap fund?
At this point, some of you maybe going, “there is a selection bias here”. Of there is a selection bias because not many actively managed funds have that long a history in India. I could repeat this with large and mid-cap indices. I can assure you that the results would be a lot more depressing.
Let us complete the rainbow with 15Y rolling data.
What return can I expect over 5Y, 10Y,15Y or 20Y from equity?
How exposure to equity should I have over 5Y, 10Y, 15Y or 20Y investment tenures?
If you wish to use the Excel file use to generate the above graphs,leave a comment.
GameChanger– Forget Startups, Join Corporate & Live The Rich Life You want
My second book, Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you want, co-authored with Pranav Surya is now available at AmazonOpens in a new window as paperback (₹ 199) and Kindle (free in unlimited or ₹ 99 – you could read with their free app on PC/tablet/mobile, no kindle necessary).
It is a book that tells you how to travel anywhere on a budget and specific investment advice for young earners.
The ultimate guide to travel by Pranav Surya is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when traveling, how traveling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for ₹199 (instant download)
You can Be Rich Too with Goal-Based Investing
My first book with PV Subramanyam helps you ask the risk questions about money, seek simple solutions and find your own personalised answers with nine online calculator modules.
The book is available at:
Amazon Hardcover Rs. 271. 32% OFF
Infibeam Now just Rs. 270 32% OFF. If you use a mobikwik wallet, and purchase via infibeam, you can get up to 100% cashback!!
Flipkart Rs. 279. 30% off
Kindle at Amazon.in (Rs.271) Read with free app
Google PlayRs. 271 Read on your PC/Tablet/Mobile
Now in Hindi!
Pre-order the Hindi version via this link
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via: Feedburner
- We are also on Google PlusandPinterest
Do check out my books
Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a youngearner
The ultimate guide to travel by Pranav SuryaThis is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for ₹199 (instant download)
Free Apps for your Android PhoneAll calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)