How to estimate returns from equity
Shrutika has been a consistent, systematic investor in equity funds since she began her career four years ago. She earns well, has a comfortable lifestyle and is single. She does not have any specific financial goal, apart from growing her portfolio and accumulating wealth over the long term. She finds it easy to use SIPs to invest regularly and is convinced about this mode. However, her concern is about the returns she earns on her investments. How can she evaluate this?#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} There is no guarantee of returns when it comes to investing, more so in the equity markets. Shrutika should understand that returns from any investment can only be estimated. Her focus should be on the processes she follows for choosing equity funds, the time points she selects to invest, and the period for which the investment is made. She will be able to protect her investments from high risks and earn market returns by using a systematic process.
How can she estimate the returns? The easiest thing for her would be to form some expectations on the basis of historical returns. In equity, the returns can be volatile. If Shrutika diversifies her investment so that she holds a basket of shares, invests consistently without putting too much money at a single point in time, and ensures that she stays for the long term across market cycles, her returns are likely to be close to the longterm average. By using SIPs, she is following this process for her investments.
The long-term return from equity investments tends to beat inflation. Equity has the ability to earn higher returns because of the businesses that are able to use borrowed funds and invest these in assets that earn higher returns. This business risk is compensated by the risk premium on equity investments. Shrutika will find that in India, the average long-term return from investing systematically has been around 15-17%. This will come down if inflation comes down in the future, and vice versa. This will, however, be subject to extreme ups and downs.
Therefore, while Shrutika should not expect to earn a steady return every year, her investment process is designed to reduce her risks, and she should do well, given her long-term orientation.
Content courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.
#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
