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Assume less, invest more

February 4, 2009

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.

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