Are you constantly chasing best performing funds? It’s time for a rethink
₹20 lakh for this purpose. Your adviser recommends you to invest approximately ₹10,000 per month in a few funds for 10 years which may help build this corpus, assuming a return of 10%. As humans, we might desire to reach that goal in five years by chasing investments which we assume can deliver higher returns.
So, you end up investing in high-risk investments and later realize that the portfolio is not doing so well or delivering negative returns. At this juncture, you reshuffle your portfolio again by adding certain investments that are currently popular or are trending and are being chased by many investors. So, for instance, consider that you have invested ₹100 in a certain product.
If that investment goes down to ₹50, it means that you’ve got a 50% loss. Now, you need to double this amount to get back your original investment, which means that you will need a 100% return . This is what happens if you extend this over that 10-year goal and you have some investments yjsy you think are very good now but it delivers a negative return in the second or third year.
Indeed, equity funds can deliver negative returns. If you choose funds that have delivered double-digit returns in the recent past and invest in them, it is very likely that the very funds may give you low returns or negative returns. If you are investing in products that you like and those funds deliver negative returns in the first couple of years, you will never be able to get back to that 10% compound annual growth rate, or CAGR, for 10 years that you require to get to your goal.
You may invest in funds you like but you should have a long term horizon. For long-term goals, you’ve have to be mindful of the sequence of return risk. Let me tell you a riddle
. Read more on livemint.com
