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Sameer Doctor

Many have come to expect astronomical returns from mutual funds. And we are not just talking equity funds here. We have recently seen gilt funds show returns of 30 per cent - 35 per cent annualised over the past couple of months. Why does this happen? The government has no borrowings at over 14 per cent - 15 per cent, that too they represent earlier long-term borrowings. Today, the interest rates are far lower. So lets take a realistic look at what one can expect out of a mutual fund investment.

Ironically, it is this very interest rate cut that has caused such good returns. Let us assume that you have lent Rs 100 to the government at 14 per cent per annum. So, your investment is worth Rs 114 a year down the road.
Should the interest rate drop to 12 per cent per annum, and I invest Rs 100, it would be worth only Rs 112 in a year.
Wouldn't I want to pay, maybe, Rs 101 to own your investment instead? After all, it will be worth more in a year's time. So, the value of your investment has increased by one per cent in a single day! Annualised, that is a whopping 365 per cent per annum return!! Sustainable? Of course not. Will this take place in the near future? No way! May look fantastic but chances of it repeating itself are slim. So please don't plan on it.

So what should you reasonably expect? The table given below will give you a rough idea. Although one could get far higher returns in equity funds, especially IT sector funds (I am a firm believer in India as an Information Technology powerhouse), please plan on a conservative basis and know what you are buying into. In the future, we shall compare various schemes and identify the parameters used to select a fund to invest in. We shall certainly try to pick funds generating far more. Don't get swayed by the figures hyped about. Absolute returns as on a particular date can be misleading. One needs to see how consistently the fund has performed for various periods of time over its entire history.

	Type of fund	Min. Inv. Period	Expected Returns
Equity
	Aggressive Sectoral Funds	2-3 years	25-30% p.a.
	AggressiveGeneral Equity Funds	2-3 years	25% p.a.
	Defensive General Equity Funds	1.5-2 years	20% p.a.
	Defensive Sectoral Funds	2 years	18-20% p.a.
	ELSS Equity Funds	3 years	20-25% p.a.
Balanced
	Balanced Funds (Over 50% Equity)	1.5+ years	18-20% p.a.
	MIP class Funds (< 25% equity)	1 year plus	14-18% p.a.
Debt
	Gilt Funds (Govt. of India securities)	2-3 months +	11% p.a.
	Corporate Debt Funds	6 months +	12-13% p.a.
	Liquid Funds	4-5 days +	7.5-8.5% p.a.

Please note that these are indicative returns averaged out over a period of time. These returns are neither guaranteed nor are they regular. Thus, in equity or even in gilt, one might see a period of very high return alternating with a period of negative return, but they tend towards the figures mentioned above over a period of time.

You might wonder about the taxation benefits that make mutual funds an attractive investment. This is specially true of debt funds, where the returns are only slightly higher than regular bank deposits, despite the additional risk with returns not being guaranteed.

Assume a person in the highest income tax bracket has invested Rs 100,000 in a debt fund for three years giving a 12 per cent return per annum ( let us assume steady returns for ease of calculation). Let's see what he earns if he were to take the return as dividend, or choose various withdrawal options under the growth scheme. While annual withdrawal is considered for easy calculations, but both monthly and quarterly options are available as standing instructions to be given to the fund. Accordingly, the investor would receive regular cheques.

	Dividend option (22% tax)	Growth - Annual withdrawal from 1st year ( Capital Gains tax 10% flat )	Growth - Annual withdrawal from 2nd year ( Capital Gains Tax 10% flat)	Growth - No withdrawal (Capital Gains tax at 10% flat)
Principal	100000	100000	100000	100000
NAV at purchase	12	12	12	12
No. of units purchased	8333.33	8333.33	8333.33	8333.33
NAV after 1 year	12	13.44	13.44	13.44
Dividend / Withdrawal	12,000	12,000	-	-
Post tax return ( year 1)	9360	11556.43	-	-
Amount after 1 year	100000	100000	112000	112000
Units held after 1 year	8333.33	7440.48	8333.33	8333.33
NAV after 2 years	12	15.05	15.05	15.05
Amount after 2 years	100000	100000	113440	125416.6
Units held after 2 years	8333.33	6644.52	7537.54	8333.33
Dividend / Withdrawal	12,000	12,000	12,000	-
Post tax return (year 2)	9360	11757.23	11757.23	-
NAV after 3 years	12	16.86	16.86	16.86
Amount after 3 years	100000	100000	115052.80	140499.9
Units held after 3 years	8333.33	5931.2	6824	8333.33
Dividend / Withdrawal	12,000	12,000	12,000	-
Post tax return (year 3)	9360	11653.33	11653.33	-
Amount withdrawn (yr 3)	100000	100000	115052.80	140500
Capital Gain	-	28825.62	33164.69	40500
Capital Gain Tax	-	2882.56	3316.5	4050
Post-Tax gain in 3 years	28080	32084.43	35146.89	36450

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