SAVE MORE OR CHASE “RETURNS”? WHAT WORKS BETTER?

SAVE MORE OR CHASE “RETURNS”? WHAT WORKS BETTER?

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When asked new investors about what they are aiming to achieve from their mutual fund investments, most of them would answer in union – ‘returns’. This is because novice investors are often advertised about maximizing the returns on their investments and returns seems to be something which is most discussed. Basis on this factor, these novice investors choose the so-called ‘best mutual funds investment plans’. Last year returns, three-year returns, star ratings simply support this view. These simple to evaluate metrics are easily available to investors. Several investors, especially new investors blindly follow these metrics and choose mutual fund schemes based on that. However, is that the correct approach towards investing? Let’s solve this conundrum and understand the right way to investing in mutual funds.

Did you know that how much you invest in mutual funds is more important than where you invest, or the growth rates delivered by your mutual fund investment plans? Let’s understand this with the help of a scenario. 

Scenario 1 – Savings rate increases but growth rates decreases

Sum of money saved and invested every month Period Rate of growth (downward trend) Final investment corpus
Rs 5000 10 years 12% Rs 11.2 lacs
Rs 6000 10 years 11% Rs 12.7 lacs
Rs 7000 10 years 10% Rs 14.1 lacs

 

As you can see from the above table, irrespective of the market returns going up or down, the sum of money invested by you plays a greater role in determining the final investment corpus. This is because, in the long run, returns on mutual fund investments or growth rates tend to be in single digits, even though they can differ substantially over a short duration of time, say two years or so. 

Scenario 2 – Growth rate increases but savings rate decreases

Sum of money saved and invested every month Period Rate of growth (downward trend) Final investment corpus
Rs 5000 10 years 12% Rs 11.2 lacs
Rs 4000 10 years 13% Rs 9.4 lacs
Rs 3000 10 years 14% Rs 7.5 lacs

As you can see, a bigger SIP investment amount is quite important in determining the final investment corpus. This is the reason why it is important to save more, and ultimately invest more rather than running behind mutual fund schemes that offer good returns. You and I may not be able to influence the equity markets, but we can surely work towards creating a better corpus by investing a bigger SIP investment amount. 

One may argue that it is the fund manager’s responsibility to choose the best mutual fund scheme for you that aligns with your investment portfolio. Surely, it is. However, you must remember that all mutual fund performance is relative to its underlying benchmark. Surely, growth rates matter. However, these metrics are still docile to one key factor i.e. much more in your control than the volatile markets – saving more. Happy investing!

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