Setting realistic return expectations is one of the most important steps before investing in mutual funds, especially at a time when more retail investors are entering market-linked instruments. While many investors look for clear return estimates, experts say mutual fund returns cannot be predicted with certainty, making it crucial to base expectations on planning assumptions rather than guarantees.
The same is the case with Rinku, an investor and a viewer of The Money Show on ET Now, who wants to know what kind of expectations one should have from mutual fund returns and across asset classes, and not only mutual funds, how one can have realistic expectations.
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The expert, Harshvardhan Roongta, CEO, CFP, Roongta Securities, highlighted that mutual fund returns are inherently uncertain because both equity and debt schemes are linked to market performance. Regulations do not allow fund houses to promise or even indicate assured returns, which means investors must approach return expectations with caution.
“As per regulations, fund houses are not allowed to give you even an indicative return that an investor can expect because both equity and debt schemes are market-linked. So, the returns that are being generated cannot really be known exactly in advance as to what kind of returns an investor will get at the end of the investment period,” the expert said.
However, when planning for long-term financial goals such as retirement or wealth creation, investors still need to work with some assumed rate of return. To address this gap, the Association of Mutual Funds in India (AMFI) issued guidelines in November 2023 to standardise return assumptions for illustration purposes. These are meant to help investors estimate how much they need to invest to reach their financial goals.
To address this, AMFI in November 2023 came out with certain guidelines to help investors plan for the future, wherein indicative returns or an assumed rate of return for illustrative purposes were provided to standardise the process, Roongta said.
Importantly, these assumed return figures are not guarantees and should not be treated as expected outcomes. Roongta emphasised that actual returns can vary significantly depending on market conditions, investment horizon and the specific scheme chosen.
The expert further mentioned that the returns indicated in that circular are in no way indicative of the point that an investor should think these are guaranteed returns that the mutual fund will give or the minimum returns they should expect.
As per the guidelines, investors may consider indicative return ranges for planning purposes. For equity mutual funds, a return assumption of around 12–13% can be used illustratively. Debt mutual funds may be assumed at approximately 7.2%, while aggressive hybrid funds can be considered in the range of 11–11.5%. Balanced funds, with equal exposure to equity and debt, may be assumed at around 10%, and multi-asset funds at roughly 9.8%.
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These figures serve as a framework to help investors design their investment strategy and calculate future corpus requirements. For example, if an individual is targeting a retirement corpus over a long period, these assumptions can help determine how much needs to be invested regularly.
Experts caution that relying blindly on these numbers can lead to unrealistic expectations. Market cycles, volatility and economic conditions can cause actual returns to differ widely from assumed figures. Therefore, investors should regularly review their plans and adjust assumptions if needed.
Ultimately, setting realistic expectations is about balancing optimism with caution. Instead of chasing specific return numbers, investors should focus on aligning their investments with their goals, time horizon and risk appetite, while using indicative returns only as a planning tool rather than a promise.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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