The Future of Mutual Fund Industry in India: Expectations and Returns from 2017 Onwards
India's mutual fund industry has experienced significant growth over the past 10 to 20 years, providing returns that have typically ranged between 14% to 20%. These returns are closely linked to the economic growth, specifically GDP growth, which has been robust and steady. From a real terms perspective, India's GDP has grown at approximately 7 to 9 percent annually, with nominal GDP growth, including inflation, at around 13 to 15 percent.
Connecting GDP Growth and Mutual Fund Returns
The correlation between returns from mutual funds and GDP growth is not coincidental. Mutual funds reflect the economic health and growth of the country. If the economy continues to grow at its current real rate of around 7%, with inflation estimated at about 5%, you can expect equity mutual funds to yield at least 12% per annum.
Calculating Expected Returns Using a Formula
An alternative method to estimate expected returns is through the formula:
Expected return Risk free return Equity risk premium
For instance, if a risk-free investment like Public Provident Fund (PPF) currently yields 8%, and the equity risk premium is around 5%, you can estimate an expected return of approximately 13%. However, it's important to note that future returns are inherently unpredictable due to various uncontrollable factors.
Comparing Contemporary Mutual Fund Returns to Fixed Deposits and Other Investments
One of the primary advantages of mutual funds over traditional fixed deposits or schemes like PPF (Public Provident Fund) is that the returns from mutual funds are typically higher. While the exact return is not guaranteed, if your investment is diversified across 4 to 5 funds from different fund houses, and you follow a systematic investment plan (SIP), you can expect returns around 15% over a period of 4 to 5 years.
Key Points to Remember Before Investing in Mutual Funds
Before diving into mutual funds, it's crucial to consider the following points:
Ensure you have at least 4 to 5 diversified funds from different fund houses. Invest through SIPs if possible and increase the SIP amount over time. Select at least one El-Saas (Equity-Related Savings Schemes) fund and one Large Cap fund in your portfolio.By following these guidelines, investors can potentially benefit from the growth of mutual funds in India while minimizing risk through diversification and consistent investment strategies.
Given the volatility and uncertainty in financial markets, it's essential to stay informed about both macroeconomic trends and specific mutual fund performance. Regular monitoring and adjustments to your investment portfolio can help maximize returns and mitigate risks.