No Shortcuts To Wealth Creation

Unless you are the beneficiary of a large fortune or have won a lottery, the process of wealth creation is an unusually long one. And this is particularly true of equity investments, as is indicated by our study of five years of returns in different categories.

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The year 2020 started on a very good note, especially for the broader markets. After underperforming for almost two years, the broader market has generated returns in double digits year-till-date. This is even reflected in the mutual fund schemes dedicated to such categories, which generated better returns for their investors. However, despite such a performance, the average returns generated by mutual fund schemes have been abysmally low. Not a single category has been able to generate annualised returns in double digits for the five years ending December 2019. Large-cap dedicated funds that remained one of the best performers over the past few years were able to give annualised returns of a mere 7.58 per cent.

A quick back-of-the-envelope calculation shows that equitydedicated mutual fund schemes on an average have generated wealth of around Rs 1.1 lakh crore in the last five years ending December 2019. Although it looks like a staggering number, similar investment in traditional saving instruments such as PPF and bank fixed deposits would have generated larger returns.

A Long Wait

Wealth is not created in a short period until and unless you are one of the luckier ones who have won a lottery. It takes its own sweet time and you need to have a lot of patience. It is often quoted that in investing, time in the market is better than timing the market. You need to give more time to your investments to let them grow. Timing your investments rarely works. This is especially true for equity and equity-related investments. The reason is simple: over a shorter duration the returns are quite volatile. Our analysis shows that even if you are invested for five years in equity, you cannot be sure of positive returns.

There are multiple periods where the Sensex – assuming it as proxy to equity investment – has generated annualised negative returns over a five-year period. The following graph shows the rolling annualised return of the Sensex for a five-year period and ten-year period. There are certain periods such as between 1998 and 2003 when the Sensex has generated negative return. Even between 2012 and 2013 it has generated negative return on a five year basis. Nevertheless, in a ten-year period the frequency of negative returns is much lower. At the same time the median annualised returns are also higher than five-years.

Going deeper we also analysed the distribution of the annualised five-year and ten-year returns of the Sensex. Since 1986, almost 7 per cent of time the Sensex has generated negative return in this duration in a five-year period on an annualised basis. In case of ten-year period the number of times negative returns has been generated by Sensex is mere 3 per cent of time. Therefore, wealth creation takes longer than expected. The longer the period of your investment horizon, higher are the chances of generating better returns. Moreover, for those who want to time the market, this is the time to invest. The line graph of the five-year annualised rolling returns of the Sensex clearly shows that a low return period is followed by a high return period. Therefore, this is an opportunity for investors to make the most of the moment and create wealth over the next five years by investing in equity MF schemes suiting their risk profile. 

In the following pages we are listing 15 mutual fund schemes divided into five each from large-cap, mid-cap and small-cap categories. These schemes have generated best returns in last five years ending December 2019, in their respective categories. These are not our recommendation list.