I am reproducing a typical advice by a financial advisor below. This appeared in Mint 27 February 2020.
A Question
Question by a reader of the newspaper: Currently my net worth is around Rs. 5 lakhs. I invest Rs. 3,000 each in Canara Robeco Emerging Equities, Aditya Birla Sun Life Frontline Equity, Kotak Mahindra Emerging Equity Mirae Asset Mid Cap, SBI Magnum Mulit Cap Fund and Kotak Standard Multi Cap Fund. I am 36 years old and planning to invest aggressively ahead too to build a corpus of Rs. 1 crore by around 2028. Am I on the right track?
A very innocent question and such questions are in the minds of many investors. They all want quick money and want it fast. Any sensible advisor should tell such investors that money does not grow on trees and there is no guaranteed way of making quick money. But the Advisor in the newspaper Mint has this to say:
The Answer
Advisor’s response to the Question: Your fund choices are fine, keeping in mind your aggressive intent and the time frame. You are investing Rs. 18,000 in an aggressive all equity portfolio. You also have Rs. 5 lakhs invested, I would presume, in an aggressive portfolio. Assuming you have 9 years to go (until the end of 2028), your total investment will be around Rs. 25 lakh. Even an aggressive long term return assumption of 12 % will get you close to Rs. 50 lakh in this period. To accumulate Rs. 1 crore, you will need to increase your monthly investment to around Rs. 45,000. If you do so, and if you maintain a similarly aggressive portfolio and markets return well over this period, you have a good chance of reaching the target.
The Advisor just does not want to tell the investor that being aggressive in investing (that is investing in higher risk mutual funds), is very risky. And you do not put all your eggs in one basket. If the share market fails, all your investments are gone in one day.
The Fraud
But more importantly let us take a closer look at the advice. Very cunningly the reader is made to feel that earning 12 % in the “long term” is representative of mutual fund returns. If you go through the Website of Morning Star ( a global mutual fund analyst website), {See
https://www.morningstar.in/default.aspx }, there are a total of 8,932 mutual funds listed in India. Of these just 241 mutual funds are earning more than 12 %! That is only 2.7 % of the mutual funds listed in India are earning more than 12 % in what Morning Star calls annualized 10 year return. No where is “Annualized Return” been defined. But you will find in article after article in the press, the rate of 12 % expected return on mutual fund is taken as given, as if most mutual funds earn that in the long run.
The Correct Response
The chances of an investor earning 12 %, annualized, (whatever it means) over a 10-year period is just 2.7 %. Now, instead, supposing you were to tell that innocent investor: Sir you are free to invest aggressively in the hope of creating a corpus of Rs. 1 crore. Let me tell you that just 2.7 % of the mutual funds in India earn 12 % or more per annum, annualized over a 10-year period. And further just 871 funds (9.8 %) of all mutual funds earn just 8 % or more, annualized, in a 10-year period. If you want to take that kind of a risk, I am no one to stop you but it is my duty to inform you.
Highlighting Risks is more important than kite flying on returns
How many investors will actually invest Rs. 45,000 in mutual funds, regularly for 8 years after being told this fact? This is the problem with the financial advisory services sector in India. Regulators look the other way, while advisors get away with fraud in the market. Because of all the market hype that has been created, individual investors are willing to believe that you actually get high returns, may be 12 % or more if you stay invested in mutual funds for a long time. This is nothing but an eye wash. No one earns that kind of income in a high risk investment.
This is the exact message of this Blog
Remember And the Tortoise Wins. Click on that and read the article to know how the volatility of returns in a high risk investment kills the actual return. Also read The Senseless SENSEX and The Layman is a Prudent Investor to know more about investment basics. In fact do go through as many articles as you can that are available in this Blog. You can sell better. And You will
Sell Risks not Returns