Most IFAs are scared to scale down the return expectations of clients. In the Indian context it is easy to see why. If you tell a client that he will get 8% in a debt fund, MOST middle class clients are going to turn around and say “I am investing Rs. 600,000 a year in 4 PPF accounts, and Rs. 200,000 in NPS so my debt appetite is already met”. Similarly the IFA who says “10-12% return in equity” will be scoffed at even in IFA meetings! It is as though the IFA thinks that the returns that a client gets is a function of what the IFA says!!

In the US the return expectation for the next decade is pretty bleak. For stocks, Bogle says he combines dividend yield (currently about 2% for the S&P 500) with projected earnings growth, which he expects to be about 5% over the next decade. He then gives that 7% return a haircut of 3 percentage points, to account for the fact that he expects price/earnings multiples–to contract over the next decade, bringing his equity return forecast to just 4%. For bonds, Bogle uses current yields, for his forecasts; right now, high-quality corporate bond yields are about 2.5%. That translates into a roughly 3.5% return on a 60% equity/40% bond portfolio, and even lower for more conservative portfolio mixes.

Technically, I disagree with Bogle on the equity return figure because he ignores the dividend GROWTH. Be that as it may, let us apply this to an Indian scenario. The current dividend yield is about 1.5% on the Sensex, projected earnings growth of 9%, yes our current PE of the market is high, but I am not sure of the PE of the mutual fund portfolio, let’s leave it unchanged. That makes the return expectation on equities about 10.5%. For bonds, current yields are about 7.5% for the 10 year G-sec and high quality corporate bonds are about 9%p.a. Now if you take a hair cut for expenses, you come to a pretty unimpressive 9.5% equity projection and a 8% debt projection. I am saying this on a current yield basis, assuming that the portfolio appreciation yield for the debt market is already captured.

Sure thanks to our friend variability, we will see 15% years and 3% years, but these numbers above are say the long term expectation – for a decade. Sure portfolios can get better returns by good stock selection, but these are the broad index kind of numbers.

Depressed? Sad? well if inflation is kept at say 4%, your returns NET of inflation is still an extremely good number, is it not? Well, now the post is for the investor, not just for the IFA.

  1. Safety, taking care and diversification are much better than fortune telling which I have done. I could be wrong by a long mile, so do not assume that these numbers are sacrosanct for a whole decade. Remember in 2006 Subramoney did not exist and in 2026 too, it may not exist.
  2. Saying ‘such low returns’ so I will NOT invest at all is also very foolish, because keeping your money under your bed does not help either. Cash has proved to be a terrible asset, and expect PPF and NPS returns to drop.
  3. You need to keep YOUR asset allocation in mind and use VOLATILITY to your advantage – entering the equity market a little too early or staying there a little too long when the party is over WILL not hurt you as much as NOT being in the party at all.
  4. Low cost bond funds will capture some of the portfolio valuation return which a bank fixed deposit or PPF will not.
  5. SIP in debt funds and SIP in equity funds is possible, remember PPF is a brilliant product only if you are ALREADY seeking inflation protection through equities.
  6. Your portfolio is dynamic, and so is your fund requirement, so if in an equity boom year if you need money, your asset allocation may change, because your draw down can happen from equities instead of debt (assuming Retiree portfolio).

The advantage of starting with a low expectation is that in case you end up getting a higher return, you are still waiting for the ‘regression to the mean’ which may not happen at all in your investing period. In 10 years time your risk profile, net worth, etc. would have changed – and your portfolio too!!


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  1. A little difficult to understand post subra sir. I agree on investing early, big and ensuring the minimization of taxation. not sure of the haircuts and expected 9% return. Believe, being selective one can target better returns.

    My thinking is the global hope of making India a bigger market and althought our money spent in mcdonalds and coke (not mine) may not be captured in BSE/NSE-the suppliers do get their growth registered.

    Request your thoughts.


  2. With muted returns in most mutual fund SIPs in 2015/2016, IFAs must be finding it hard already to convince clients..but that’s assuming that clients ask for that info 🙂

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