Earn Double Digit Returns From Your Funds

Taking into account the performance of the funds in various categories, we have chosen various sectors and the funds therein that display a very reassuring quality in terms of returns

One of the key reasons why someone gets interested in equity is its ability to give superior returns in the long run. Historically, equity as an asset class has generated returns better than most other asset classes, including physical and financial assets. In the last few years, however, returns generated by equity have been very poor, especially from the broader market perspective. Mid-cap and small-cap indices are down by more than 10 per cent over the past three years. Frontline equity indices created better returns thanks to a handful of stocks that helped the indices to move up.

All this is reflected in the returns generated by equity-dedicated mutual funds. In the three-year period ending July 2020, small-cap and mid-cap-dedicated funds on an average have generated negative returns. Nonetheless, in the last one year they have turned positive. The average returns generated by equity-dedicated mutual funds amounts to just 4.19 per cent and if we extend the study to three years, the annualised return drops to just 1.06 per cent. However, analysing the performance only between two points will not show the right picture of return that you can expect from equities.

For example, Sensex, since its inception in 1979, has generated annualised return of 16.31 per cent. Since the start of the millennium, however, it has come down but still remained in double digits. The average ten-year rolling return of Sensex since 1990 is 12.2 per cent. One of the characteristics of returns by equity is that they do not come in a straight line but follow a random pattern around the mean. The above graph clearly shows this pattern. In some years they have generated returns better than the average while in other years they have dipped real low. Nonetheless, they have the tendency to revert to the mean.