The best-performing funds are high-risk high-reward small-cap funds
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If we invest Rs10 lakh in a balanced fund, and start a systematic withdrawal plan (SWP) of Rs10,000 per month, then what will be the corpus after 10 years? Can you also give us a range of what that corpus will be if we invest in the best-performing and worst-performing funds?
To answer your first question, we would need to make a few assumptions about the rate of return of the fund where you have made your investment. The balanced fund category has returned at an annualized rate of 10.85% over the past 10 years. It would not be unreasonable to assume a similar rate of return would be possible in the next 10. However, let’s consider three possibilities around this number. An annual return possibility of 9%, one of 11%, and a third possibility of 13%. If you start withdrawing from your corpus right away, you would be withdrawing at a rate of 12% initially from your corpus (annual withdrawal of Rs 1.2 lakh from a Rs10 lakh corpus). So, what would remain in your hand would be a matter of a race between your rate of withdrawal and the rate of growth of the fund, in very simple arithmetic terms. So, considering the three possibilities and with some help from spreadsheet tools, we can see that if the rate of return is 9%, you would have Rs2.8 lakh remaining in your corpus at the end of 10 years. If your portfolio grew by 11%, you would be left with Rs5.4 lakh and if it should grow by 13%, you will have a bulk of your starting corpus to the tune of Rs8.9 lakh still left in the kitty.
Answering your second question is a lot trickier, but let me try. Over the past 10 years, the best-performing category of funds have been the high-risk-high-reward category of small-cap funds, which have returned in excess of 15%. If your portfolio should do as well, you will be left with close to Rs13 lakh (more than your initial corpus) after your 10 years of withdrawal. On the other hand, if your portfolio returned close to 8%, which several categories of funds have done, you will only have about Rs1.7 lakh left from your savings. Of course, you should note that this is a very speculative and is more arithmetic than fund analysis. The performance of your investments could turn out to be significantly variant from these possibilities.
I am 31 years old and have no knowledge of mutual funds. I wish to learn by myself and start investing at least small amounts periodically. Can you recommend some books or other sources from where I can read and understand the mutual funds space better? I can and will consult a financial planner when I plan to invest larger amounts, but I would still like to understand how everything works before investing my money.
You are doing the right thing by starting your investment journey by seeking to learn about it. And you are proposing to do so in the right order—learn the basics first, consult an expert adviser, and then start investing.
However, please remember to continue your learning process even after your investments are set.
In terms of how to go about learning, rather than make specific recommendations, let me point you in the direction of resources and let your favourite internet search engine do the rest of the job.
For books, simply search for ‘mutual funds India’ in your preferred online shopping platform and you will find a handful of books written by Indian authors for the Indian mutual fund investors.
However, beyond books, there are several blogs and websites such as ValueResearchOnline.com that provide very useful guidance on both getting started as well as keeping you informed.
If you are the type of person who would rather watch video tutorials to learn, there are several websites from mutual fund companies such as Franklin Templeton and Birla Sun Life that do a stellar job of educating investors and spreading awareness about mutual funds.
If you go to their websites, you will see links to such areas. Also, you would do well to keep an eye on investor awareness camps run by asset management companies in localities around the country where you can get plenty of good information and opportunities to interact with personal finance gurus.
Srikanth Meenakshi is co-founder and COO, FundsIndia.com.
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