Setting the right Returns Expectations on your Investments

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What returns should you expect from your investments?

Historically, equity returns have been in the range of 15-20% annualized over the last 20 years. Many people think it is their right to get 15-20% returns on equity investments in the future as well. This may be the wrong way to set your returns expectation.

Returns on investments (equity/debt/gold) are influenced by various factors – economic growth, inflation, interest rates, and prices at which you invest. These variables keep on changing with changing times and situations.

Nominal GDP growth (real economic growth + inflation) is highly correlated with the aggregate revenue & profitability growth of all the businesses in India over the long term. The returns on equity one can generate in high-growth economies from a lower base can be fantastic. However, as the economies mature, the growth rates reduce and when equity prices are stretched, the returns on equity also get subdued.

Coming back to our question, what should be the fair expectation of returns on your investments? The base case should match the inflation to maintain our purchasing power. Depending upon the risk appetite and capacity, one should expect inflation + 2-8% returns on their investments.

For example, earlier in 2000-2010, when inflation was close to 8%, returns of 10-16% (8%+2-8%) were a reasonable expectation. In a scenario, when inflation is say 5%, reasonable returns expectation should be 7-13%. On the contrary, when inflation is very high at 12%, the expectation of fair returns should be 14-20%. Mind it, the expected returns we are talking about here are not every year but on an average annualized over the long-term investment horizon of 5+ years.

It’s not how much you got in the past that should decide your returns expectations but how much inflation you will experience in the future – that should anchor your investment returns expectations.

Setting the right anchor to your expectations would reduce the scope for disappointment and increase your chances of meeting your financial goals successfully.

Truemind Capital is a SEBI Registered Investment Management & Personal Finance Advisory platform. You can write to us at connect@truemindcapital.com or call us at 9999505324.