The hidden risk of mutual fund portfolios with 20%+ returns

Summary: A portfolio showing 20 per cent growth may not be as “great” as it looks. In fact, the number may be hiding more risk than reward. So, let’s find out why many of these portfolios are chasing applause rather than building real wealth…

Scroll through social media these days, and you’ll see a familiar kind of post. Someone proudly flaunts a screenshot of their mutual fund portfolio showing annualised returns of 18, 20, even 22 per cent. The comments roll in:

• “Bro, you’ve picked the best funds.”
• “Boss, mujhe bhi batao kaunsa fund hai.” (Please guide me on which funds to pick)
• “You’re a genius investor!”

It feels like the modern equivalent of showing off exam marks, except here, the higher your XIRR, the louder the applause.

But beneath the headline number lies an uncomfortable truth. A 20 per cent return (XIRR) doesn’t automatically mean the portfolio is great. In fact, for many investors, it could be masking some very real risks.

The illusion of ‘best’ funds

The first mistake in this kind of chest-thumping is assuming there’s a universal list of “best” funds. There isn’t.

A fund that suits a 23-year-old software engineer who just started earning may be completely inappropriate for a 40-year-old with a home loan, kids in school and parents depending on him. Similarly, a retiree who depends on his corpus for monthly expenses needs a completely different portfolio.

The “best” fund, therefore, depends on you, your goals, your time horizon and your risk appetite. Without context, returns are just numbers floating in the air.

The equity trap

So, what’s common among many of these “20 per cent return” portfolios?

They’re often 100 per cent equity.

For someone in their early 20s, that may not be the most terrible idea. With a small corpus and decades ahead, they can afford to take bigger risks, though there are certain caveats in this case as well. A 50 per cent market crash may not hurt much when your total portfolio is Rs 2 lakh. For some investors who have the big picture, it may just be motivation to invest more at lower prices.

But for the vast majority of investors, especially those with larger portfolios or shorter horizons, putting everything into equity is fraught with risks. While an all-in equity portfolio can work brilliantly in a bull market, the first sharp bump can throw you off track.

Why? Because equities are volatile. History shows that the Indian market has had periods where indices have fallen 50 to 60 per cent. Recovery happens, yes, but it can take years.

If your entire portfolio is in equity and you suddenly need money, for a child’s college admission, a medical emergency or even just to stay calm during a job loss, you may be forced to redeem at precisely the wrong time.

That’s why at Value Research, we keep repeating: if your horizon is less than five years, equities should not dominate your portfolio. For goals within three to four years, don’t touch the pure equity funds. Stick to debt or hybrid funds.

Only if you have the patience to stay invested for over five years should you invest in equity funds. But even then, it should not be the only asset class. You need to do your asset allocation smartly.

What is asset allocation?

Think of asset allocation as shock absorbers in your financial vehicle. Debt funds and hybrid funds may not give you 20 per cent returns, but they ensure you don’t quit investing in panic when markets crash.

Asset allocation works on the principle of diversification. It helps you spread your money across different asset classes such as equity, debt and gold, so that if one underperforms, the others can help balance your overall portfolio.

In other words, a balanced portfolio cushions drawdowns. For instance, in 2008 and 2020, while pure-equity portfolios halved, balanced portfolios fell far less. That cushion often makes the difference between investors who stay the course and those who abandon the journey.

Therefore, having exposure to equity, debt and hybrid funds is the smart way to invest your money. It ensures your hard-earned money is not held ransom to the short-term swings of the stock market.

Returns aren’t the only thing that matter

There’s another angle that often gets missed in the social media race for bragging rights. Wealth creation depends not just on your portfolio returns, but also on your savings rate.

Simply put, the savings rate is the portion of your income that you consistently save and invest.

If you earn Rs 1 lakh a month and save Rs 20,000, your savings rate is 20 per cent. Increase that to Rs 30,000 and your savings rate jumps to 30 per cent. Over time, this difference matters more than whether your portfolio earns 14 per cent or 18 per cent.

Think about it:

• Someone with a high savings rate but modest 12-14 per cent returns will often beat someone with a low savings rate chasing 20 per cent.
• That’s because compounding works best when there’s more money being put to work regularly.

So, while Twitter and Instagram glorify the 20 per cent portfolios, the quieter investor steadily saving 30-40 per cent of their income is often the real winner.

The bigger picture

At the end of the day, investing isn’t about brag-worthy screenshots. It’s about building a balanced portfolio, without derailing your journey at the first sign of turbulence.

Yes, equities are powerful wealth creators. But too much of a good thing can be dangerous. Balance your portfolio with debt, hybrids, or even gold if it suits your goals. Focus on your savings rate. And most importantly, invest with your own time horizon in mind.

That way, the next time someone flaunts their 20 per cent returns, you can smile, knowing your portfolio is designed not just to shine in bull markets, but to be resilient during painful market downturns as well.

Want to build a balanced portfolio?

A strong portfolio isn’t about chasing the hottest fund or bragging about last year’s returns. It’s about balance and spreading your money across equity, debt and hybrid funds in line with your goals and risk appetite. That’s where Value Research Fund Advisor helps.

At Fund Advisor, our seasoned analysts focus on consistency, risk-adjusted performance and the fund manager’s track record to help you pick the right funds. More importantly, the platform can suggest the right fund combinations so your portfolio isn’t skewed towards unnecessary risk.

Explore Fund Advisor Today

Also read: Don't be fooled by 'This fund has given 200 per cent returns' headlines