Stocks (and hence mutual funds) are often sold as something that give "assured" long term returns over a period of time. While this has been true for most of the times, and all time if we consider a long enough time horizon in India's recent history but is this always true?
Can it be possible that stock markets can give lesser, say 10% returns over next 10 years? Or 5 percent annual returns? Or, taking inspiration from Nicholas Taleb, a black swan event happens and your end up barely recovering 80 percent of your principal amount (i.e. 20 percent loss) -
Theoretically yes.
Hopefully no.
I am not a predictor of future, nor are thousands others who claim to have more than 1000% percent surety of future events.
So, if you are contemplating taking a personal loan @ 12% for some financial need and want to be invested in a mutual fund for "assured" 12 / 15/ 18/ 25 percent returns, maybe you need to rethink.
If you want to borrow money @ 12% just to invested in a mutual fund for "assured" 12 / 15/ 18/ 25 percent return, read the above point.
If you want to put all your investments in stock markets, check the allocations vis a vis debt. Possibly no harm in keeping most of your investment (or even all your investment, if you have that faith) in stock markets, but if you are taking debt to invest in market, I don't think it is a wise option. This may even be a "virtual debt" like holding on top stocks but defaulting on credit cards due to cashflow issues.
If markets give, say 10 percent annualized returns over nest few years, will you be able to identify its peak (and convert to cash close to peak) or will it remain tied to your notional returns? What will be returns in this case?
(Of course, with returns like 15% or more, this question is unlikely to arise.)
Is past performance an indicator of future performance?
What are your thoughts?
Can it be possible that stock markets can give lesser, say 10% returns over next 10 years? Or 5 percent annual returns? Or, taking inspiration from Nicholas Taleb, a black swan event happens and your end up barely recovering 80 percent of your principal amount (i.e. 20 percent loss) -
Theoretically yes.
Hopefully no.
I am not a predictor of future, nor are thousands others who claim to have more than 1000% percent surety of future events.
So, if you are contemplating taking a personal loan @ 12% for some financial need and want to be invested in a mutual fund for "assured" 12 / 15/ 18/ 25 percent returns, maybe you need to rethink.
If you want to borrow money @ 12% just to invested in a mutual fund for "assured" 12 / 15/ 18/ 25 percent return, read the above point.
If you want to put all your investments in stock markets, check the allocations vis a vis debt. Possibly no harm in keeping most of your investment (or even all your investment, if you have that faith) in stock markets, but if you are taking debt to invest in market, I don't think it is a wise option. This may even be a "virtual debt" like holding on top stocks but defaulting on credit cards due to cashflow issues.
If markets give, say 10 percent annualized returns over nest few years, will you be able to identify its peak (and convert to cash close to peak) or will it remain tied to your notional returns? What will be returns in this case?
(Of course, with returns like 15% or more, this question is unlikely to arise.)
Is past performance an indicator of future performance?
What are your thoughts?
Great blog, Nikesh bhai.
ReplyDeleteMutual funds, as per my understanding, are a relatively safe bet today. But of course, if you take a personal loan @12% and expect a return @15-20% over the next few years, it might turn into a loss, or even a complete disaster.
I have recently started investing into mutual funds and planning to put most of my savings (barring 10-20% by way of FD,etc.), into a variety of MF. What do you think?
Regards,
Pranab
I think one should have a good mix of exposure to debt & equity. Debt can help in capital protection & equity (via MF) can potentially help capital grow. But it is almost impossible to predict the markets & hence relying on its growth entirely may be a bit risky. The mix can depend upon your needs & expected returns. At current levels (which I think is a bit expensive), I would like to be invested in equity but avoid over-exposure.
DeleteWhat ratio for debt: equity do you recommend? I know 'balanced' mutual funds have a built-in ratio of 25:75. Is that healthy enough? At an early age (<35 yrs) an investor might be tempted to go for higher equity.
ReplyDelete-Pranab
It is often suggested that idea equity exposure is - 100 - your age (hence, 2/3rd of your investments approx). However, I believe one needs to factor in how expensive markets are to figure out ideal mix for self. While there are no right or wrong answers, at current levels, I would prefer not more than 50% in equity.
ReplyDelete