When an adviser comes to us and shows us an investment, the first question to ask is “Kitna Milega”. It is a question which cuts across all classes of investors. This is sad becasue as you mature you should know that this is a stupid question. However, this is so ingrained in “investors” that all financial products are sold on a basis of  “return expectation”. Stupid yes, but that is the ONLY way that a fund house knows how to sell a product, because the stupid investor will ask that question.

This brings us to the recent news item that DSP Mutual fund is opening its small cap fund for investing. They have gone and said that the worst return has been -67% and on an average it has given 11% over 10 years. With this kind of a standard deviation, believe me, the word average makes no sense. Also over the next decade (ha another stupid blogger sticking his neck out) equity returns will be less than the past few decades – on an average I mean (!!). So in 2030, let us say this fund has given us 9% cagr, it may be MUCH BETTER than 11% – if we are able to hold inflation at say 3% over the decade. However unlike the past decade, we may be paying LTCG. Phew. So does asking this stupid question matter?

I do think Amc should consider talking to IFA (and therefore investors) to move away from this super idiotic question. Of course easier said than done. Just because I can do it in a class or with a client on a one-one basis, I am not sure that 99% of the sales people can do it. Those sales people who can do are no longer sitting in front of clients!!

Whenever I do an article on returns and say 18% return…somebody will remark “this is too high”. Of course a few will say 18 is not possible, only 12% is possible….or some shit like that.

Fact is none of us know what rate of return we will get over the next 30 years. Fairly obvious I thought. We put a number because EXCEL cannot work with “I do not know” as an input. We assume that a Rs. 5000 per month sip over 20 years at 12% will mean there will be Rs. 55L in that fund. That is all. It is just proof that COMPOUNDING WORKS.

It does not mean that you will get 12% or 18% in that fund. You may get 12% or 23% return. It is just an assumption. In real life you will be watching it on a day to day basis. The important thing to learn is you need to create funds that will remain untouched over real long periods of time.

When a client asks an IFA “what return will I get” the best is to ask the client to read this post.

None of us know how much return we will get over 4 weeks, 4 years or 4 decades. We just have no idea.

However you start a journey assuming that a client needs Rs. 55 lakhs in 20 years time. So he has to do a Rs. 5k sip for 20 years. If his return falls over 2-3 years, THE ONLY THING HE CAN DO is to increase the SIP. Your IFA talks as though he controls everything. HE CONTROLS NOTHING. You think you know how much return you will get.

Nobody knows what will be the “return” or “r” in the compounding formula…Donald Trump, Narendra Modi, Nirmala Sitaraman…why even Rajdeep Sardesai and P Chidambaram do not know how much return you will get over the next few weeks, months, years or decades. We are all guessing. Most important thing is that we will be seeing it on a regular basis. Every year we will get a number. Say we get 8% return in the first year instead of 12, we may not do anything. However if we get 8% return for the first 5 years we will take corrective action. We may increase the sip amount to Rs. 6000 or whatever we can. Or in a worse case scenario we may push the goal back by a year or two.

We assume some numbers so that we can use excel. We will monitor it on a continuous basis so that we can take corrective action.

https://www.youtube.com/watch?v=adKhxwI4wz8