The investment trap: How not to fall for 2% per month assured returns
₹1,000 crore), let me share something that you should probably print and pin on your wall. It’s a quote by Charlie Munger: The world is not driven by greed. It’s driven by envy. And complement this with another one (I am not sure of its origins): Return of capital is more important than return on capital. The first quote is the root cause of perhaps all irrational adventures that investors are willing to undertake in their desire to beat competing standards of living.
The second quote is the perfect antidote to any irrational envious behaviour. In the absence of the antidote, investing driven by envy is deadly. It compels you to chase high and fast returns.
In my experience, almost all such adventures result in huge wealth destruction. Here’s what else envy does. It forces you to junk any sane asset allocation plan that could otherwise be a safeguard that prevents you from total wealth destruction.
Let’s spend a moment and understand what 2% returns per month actually means. It amounts to an annualized return of 26.8%. Let that sink in.
26.8%. How does this compare to, let’s say, one of India’s favourite mutual fund schemes over the last five years —Parag Parikh Flexicap Fund? It earned only 23.4% per annum, over this period. Another popular fund, HDFC Flexicap, returned just 19.0%.
Other than the fact that 2% per month returns amounts to an irrational return expectation, there’s another big issue with this. The return is paid out every month. So, not only does the person offering this scheme, promise a crazy return when soliciting funds, he also assures to pay it off month after month.
Whether the markets are up, or down. At this point you are probably wondering how someone could fall for this scam. The fact is many
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