Chasing 12% equity returns? It may be the wrong goal

But should investors realistically expect 12% annual returns from equity mutual funds, especially when studies show a gap of as much as five percentage points between fund returns and investor returns? First, investors must understand that the oft-quoted 12% is a long-term average achieved over many years, not a year-on-year outcome. Misinterpreting it as an annual return often leads to unnecessary portfolio churn. Averages also mask volatility and sequence risk. In reality, the order of returns matters greatly, particularly when the investment horizon is limited. For instance, a systematic investment plan (SIP) in the Nifty 50 started in January 2012 delivered a five-year return of about 9% per annum, but a seven-year return of roughly 12% per annum. Over longer holding periods, these fluctuations tend to smooth out. The same SIP has generated annual average returns of around 14% over 10–15-year periods. This illustrates that realized returns depend heavily on the sequence of market movements, which stabilize only over time. For investing in mutual funds, the standard disclaimer that past performance is not indicative of future results, remains relevant. For example, a Nifty 50 SIP has experienced declines of up to 65% over one-year periods, yet over 10-year holding periods returns have historically remained positive at about 4% or more. The lesson is clear: time significantly reduces the risk of loss and should guide investors in choosing an appropriate investment horizon. While historical averages indicate a realistic range of outcomes, investors should moderate return expectations. Returns have gradually declined over time. Seven-year SIP returns in the Nifty 50 have fallen from nearly 30% per annum in the early 2000s to about 15% per annum for a SIP started in January 2020. The road ahead is also likely to remain volatile amid geopolitical shifts and rapid technological change that challenge established economic patterns. A more meaningful use of past returns is to evaluate consistency rather than magnitude. A fund may post strong performance during favourable market phases or due to one-off bets, but sustained performance across varying market conditions reflects disciplined strategy and effective risk management. Metrics such as the information ratio, available in fund factsheets, help assess this consistency. Investors should also remember that long-term equity returns are closely linked to a country’s nominal GDP growth. Markets may outperform or underperform economic growth for periods due to valuation changes, liquidity conditions or sentiment, but they cannot indefinitely grow much faster than the underlying economy. To achieve reasonable long-term outcomes, investors must remain invested through market volatility and select products aligned with their time horizon. Reacting to short-term declines through premature exits locks in losses, while allocating high-risk assets to near-term goals increases the likelihood of withdrawing during downturns. Discipline and appropriate asset allocation help realised returns converge with long-term averages. Finally, because returns are uncertain and largely outside an investor’s control, the more powerful lever is savings. Strong returns matter little without adequate investment contributions. Assuming a 10% annual return, an investor contributing ₹25,000 per month for 20 years would accumulate about ₹1.8 crore, while investing ₹40,000 per month would grow to roughly ₹2.9 crore. If contributions are stepped up annually–by 10% in the first case and 12% in the second–the final corpus rises significantly to about ₹3.86 crore and ₹7.37 crore respectively. In both scenarios, returns remain the same; it is the savings rate and disciplined increases that drive wealth creation. A 10-12% return may be achievable over long periods alongside sustained economic growth and disciplined investing. But ultimately, consistent investing, and not return chasing, is the real key to building wealth. Mrin Agarwal is a financial educator, founder of Finsafe India and co-founder at Womantra.