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Assume less, invest more

Here we look at exceptional situations, where conventional financial wisdom is turned on its head.

Here we look at exceptional situations, where conventional financial wisdom is turned on its head.

11.2%  is the average annualised return from diversified equity mutual funds in the past five years. Investors should, therefore, tone down their expectations.

51% was the drop in the Sensex between 23 January 2008 and 23 January 2009. The average equity fund lost more, falling by 51.7% during this period.

Rule: Investors should choose a mutual fund that has the potential to earn higher returns.

Exception: When it comes to retirement savings, how much you save is more important than how much your fund earns.

Suppose you earn Rs 25,000 a month and get an 8% raise every year. If you put 5% of your income in a fund that earns 12% a year, after 30 years you will have Rs 88 lakh. Raise the investment to 10%, and even a lower return will give you a bigger corpus.

The BSE Sensex has given a return of over 15% in the past 25 years, but don’t bank upon such performances. A black swan year like 2008 can upset your apple cart. Instead of trying to pick the hottest fund in the market, you should aim at raising your investment while assuming a lower rate of return. It’s better to err on the side of caution and save more.