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What returns can we expect from different fund categories?

While estimating future returns from equities is difficult, Dhirendra Kumar explains what one can reasonably expect, given the prevailing interest-rate and inflation scenario

What is the range of returns we can expect in large-, mid- and small-cap funds after 20-25 years?
- Prakash Pandey

Although I cannot tell you exactly what returns you can expect from various equity classes over the next 20-25 years, I can give you some way to think about it. First, one should not expect the kind of returns that we saw in the last 25 years to continue for the next 25 years. If we consider the last 25 years, in the first 15 years, tax-free bonds of the government of India used to yield about 11 per cent tax-free return. Thus, when the risk-free return was at 11 per cent, equities delivered a return in the range of 18-25 per cent.

However, Warren Buffett, the famous investor, is unable to match the return of gold over the last 20 years with his investments. His returns stand at about 10 per cent, which is a very good return, owing to the fact that inflation and interest rates in the U.S. are 2 per cent and 1 per cent, respectively. For low inflation and interest rates, 10-12 per cent return on investment could be a very high return. Similarly, a 20 per cent return if the inflation is 12 per cent will be a very poor return and 10 per cent return if inflation is 1 per cent and fixed income return is 4 per cent might be a very decent return. So, these are all moving targets, they are not frozen in time, and are a function of the environment and context. The real returns on your investment post inflation are what matter.

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