How to earn good returns in mutual funds.

It’s a simple question any investor in a mutual fund would keep asking.  The answer, however, will be multi-layered, unlike some of the popular posts/blogs on this subject.

What’s a good return for you?  As head of Prokens Opesmetrics, I ask everyone who invests through us this question every time.  As expected, no one answers this question in the same manner. Some examples:

• If you are a young investor, you will likely answer: “High.”
• If you predominantly keep your money in Post Office and Bank deposits, you will likely respond: “Anything better than what I am earning currently.” Some brave hearts who predominantly use PO/Bank deposits take the courage to say: “At least double the FD rate.”
• If you have dabbled in stock markets, your answer will likely be: “better than Index Return.” Did you forget to include “Total Return” somehow?
• If you are a retiree, you are likely to demand: “a return that supports my cost of living.”
• If you are financial planning zealot, you would say: “a return that would fulfil all my goals and objectives.” Can we cheekily add “as early as possible, so that I can retire in my late forties”?
• Some investors cleverly deflect the question. They will answer indirectly: “I don’t want to lose money, and the returns should be reasonable.”  Later, it’s possible to interpret this requirement in any way conveniently.  Such investors will most likely exit mid-way when the volatility hits their portfolios.
• Many investors will demand specific rates of return, usually upwards of 13%. They also can’t exactly say why they should get such a return. 
• Does the gender of the investors make them think differently? It appears so.  In general, women are more reasonable than men in their return expectations. 

These examples show that a simple question elicits vastly different answers.  It’s ‘personal’ finance, after all. There are as many ‘rates’ of return sought or demanded as many investors are there.

In my professional experience, I have found that not discussing investment returns in the early part of the relationship will lead to disasters later.  Some of the emotions I must overcome when talking about ‘returns’ with the investors are here:

Lastly, some investors have bizarre notions about investment return. I have encountered a few investors who asked me to recommend schemes that can deliver 60-70% returns for the next three years.  Not in total over three years, but every year!  They pointed out a xyzzy scheme that delivered such a return in the recent past. Usually, such schemes will be sectoral or thematic. It will be nearer to the ending days of a ‘bull rally’ when investors notice such schemes and their returns.  These investors think the past repeats the same way in the future. 

None, let me repeat, none of the investors has ever asked me what it entails in terms of risk to gain a particular rate of return while investing in mutual funds.  Since this series is about ‘return,’ I will skip the topic ‘risk’ for now.  But we must visit it sooner.

Read Next: (Series Post #2) – Mutual Fund Returns Are Variable

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