What equity return will you be happy with?

Financial Planning

A few days ago, I had asked in Facebook group Asan Ideas for Wealth, “If you could gaze through a crystal ball and look into your future portfolio at a time when you are just about to retire, what net return from equity (assuming you are left with some!!) would you be happy with?”

The responses were either in terms of inflation (2-4% above inflation) or an actual number .Many (including me) said  that they would be happy with about 12% and delighted with about 15% (which is pretty much the same as 2-3% above long-term inflation).

I think you would agree with that such an expectation is quite realistic and has reasonable chance of coming true (provided the goal is at least 10Y away).

The best part is that it can be achieved with relatively low-risk options.

1) With mutual funds alone. No need for direct equity, which is definitely more stressful. There are many who will gladly forgo the chance of getting a higher return with stocks and stick to mutual funds. It is simpler and hassle free. Typically most mutual funds will get you home (see below).

2) With large-cap funds alone. Consider this. We have 34 ten year old large cap funds in the market. Out of these, 13 are index funds. They have managed to make around 11-12% (XIRR) in a 1o-year SIP. This is a pretty decent return with zero stress, but only with the conviction in index investing.

Assuming we can do better with an active fund and we review the investment at least once a year, we can get rid of dud amcs like JM and LIC Nomura.

This leaves us with 19 large cap funds.  The lowest 10-year SIP XIRR is

14.45% by Baroda Pioneer Growth Fund and the highest,

17.68% UTI Equity.

All we need is one large cap fund with a proper investment process in mind (preferably on paper). This will help us attain the return that we desire.

Of course, we can include mid caps , small caps etc. for diversification and potential to earn more returns. The point I wish to make here is that beating inflation and even getting the return that we would eventually be happy with is quite simple.  There are many ways of doing this. Even a single equity-oriented balanced fund will get the job done comfortably.

So why bother taking on more risk? Why worry about  market movements, PE based investing, tactical asset allocation etc. when can keep it so simple

Wealth is created by investing early and investing as much as possible systematically irrespective of market conditions.

Investors who are new to equity markets should start with a simple large cap index or actively managed fund, get used to market volatility and then can branch out to the mid and small cap segment.

Why waste time fretting about portfolio management? Let us do the basics right and spend our time with people we love and doing the things that we love.

Do you agree?  If you could gaze through a crystal ball and look into your future portfolio at a time when you are just about to retire, what net return from equity (assuming you are left with some!!) would you be happy with?

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20 thoughts on “What equity return will you be happy with?”

  1. Hi Pattu sir,
    I sometimes wonder why amcs like JM get it so wrong when the basic principles of investing success are clearly defined; are the managers simply less competent than the ones at Quantum or Franklin? Any thoughts on their abysmal performance?

  2. Hi Pattu sir,
    I sometimes wonder why amcs like JM get it so wrong when the basic principles of investing success are clearly defined; are the managers simply less competent than the ones at Quantum or Franklin? Any thoughts on their abysmal performance?

  3. Hi Pattu
    Thanks for the thought provoking post. My number will be 15% over the next 20 years. Feel that this is reasonable given last 11 years experience in the market.

    Regards, Indra

  4. Hi Pattu
    Thanks for the thought provoking post. My number will be 15% over the next 20 years. Feel that this is reasonable given last 11 years experience in the market.

    Regards, Indra

  5. Repeating what I’ve said on the FB group many moons ago – The Nifty Jr Midcap ETF (Junior BeES) has given nearly 25% CAGR since inception and has handily beaten the Nifty and inflation. Recently, even the likes of Marty Whitman have been unable to beat ETFs (see Barron’s excellent article here http://online.barrons.com/articles/can-third-avenue-get-back-on-track-1431136270 )

    Your star fund manager (or a reputed house like JM or Nomura) could end up in the same boat. Or we could lose a star fund manager like Parag Parikh in an unfortunate accident.

    If you are going to be invested for say 20-25 years or more, why take a risk? Aren’t the index returns enough?

    1. Agree. However some active funds are less volatile than then index. As long as it is so easy to beat the index (80% of funds manage that), I dont see why one cannot take advantage of this.

  6. Repeating what I’ve said on the FB group many moons ago – The Nifty Jr Midcap ETF (Junior BeES) has given nearly 25% CAGR since inception and has handily beaten the Nifty and inflation. Recently, even the likes of Marty Whitman have been unable to beat ETFs (see Barron’s excellent article here http://online.barrons.com/articles/can-third-avenue-get-back-on-track-1431136270 )

    Your star fund manager (or a reputed house like JM or Nomura) could end up in the same boat. Or we could lose a star fund manager like Parag Parikh in an unfortunate accident.

    If you are going to be invested for say 20-25 years or more, why take a risk? Aren’t the index returns enough?

    1. Agree. However some active funds are less volatile than then index. As long as it is so easy to beat the index (80% of funds manage that), I dont see why one cannot take advantage of this.

  7. Thanks Pattu. “Even a single equity-oriented balanced fund will get the job done comfortably.” – Appreciate that and would love to see a post on comparative analysis of top quartile ‘equity-oriented balanced funds’ with the top quartile of ‘any cap, pure equity funds’ and the ways and means to getting the job done through 1 or 2 of equity-oriented balanced funds..

      1. Thanks for your consideration Pattu. Its always a pleasure reading and soaking all this up..leading to (hopefully) better actions 🙂

  8. Thanks Pattu. “Even a single equity-oriented balanced fund will get the job done comfortably.” – Appreciate that and would love to see a post on comparative analysis of top quartile ‘equity-oriented balanced funds’ with the top quartile of ‘any cap, pure equity funds’ and the ways and means to getting the job done through 1 or 2 of equity-oriented balanced funds..

      1. Thanks for your consideration Pattu. Its always a pleasure reading and soaking all this up..leading to (hopefully) better actions 🙂

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