Dhirendra Kumar sheds light on the unpredictable nature of the equity markets
How much return should one ideally expect from equity mutual funds over a period of time?
I can say that there is definitely a framework that one should follow but at the same time, it is very hard to predict. Equity returns are a function of inflation and adding to it, is the risk-free return that one can derive from the investment.
When the interest rates were between 9-13 per cent in India, the equity return was about 18-20 per cent with all kinds of risks. Now, the risk-free return can be assumed at around 7-8 per cent. So, I would say that think of equity returns in terms of a multiple of inflation. If you are able to generate 7-8 per cent without taking any risk, then you should expect one and a half times of it from an index fund, which is an unmanaged diversified portfolio. And then, I would expect to earn a slightly higher premium on investing in an actively managed fund, as the fund manager would exercise selectivity and avoid the trash in terms of bad companies. Further, I would like to have a reward for my discipline of investing regularly that I am investing even when the market goes crazy. Consequently, I would like my return to be a multiple of three times of inflation. So, this will be my expectation. However, the market doesn't know that I am expecting all these. But generally speaking, if we have inflation of 4 per cent, I would say a return of 12 per cent should be good enough.