To me, what emerges out of this is that the past ranking of the scheme is not a reliable indicator of what its future rank will be. In case you’d like to take a look at the data supporting these results, please send me a contact. Do future earnings matter? After we invest in a system, it should be correct to believe that the scheme’s returns will impact our returns, right?
Well, yes and no. If we make an individual investment, yes then. If we make multiple investments, maybe not then. Over these 10 years, RRSF ended up giving a higher return than SBIMMF. However, the investor would make additional money in SBIMMF than in RRSF. The table below shows the difference. Scheme returns and buyer profits have been computed using the various tools at Advisorkhoj and assume a regular monthly SIP on the first business day of each month. Loads are not considered. Let me try and give these numbers a bit more context.
The growth in the NAV of RRSF over this era was 36% more than the development in the NAV of SBIMMF. Yet, the gain to the investor from investing in SBIMMF was 57% more than the gain from investing in RRSF. I look at this as proof that investing in a scheme that provides better returns, in no real way, ensures that we will get better comes back. Indeed, the profits to us can be less than what we may picture much.
I keep in mind a thought shared with a stockbroker in my early days in the business. I paraphrase: “You might earn a 100% in a yr but if all you invested is Rs.100, of the year is Rs all you will have by the end.200. I have viewed that as a useful comment on how wealth is made.
To refine it a bit, the wealth that we build is most influenced by the total amount that we save and make investments, and the timeliness of our investments (i.e. our capability to get regularly, without delay). We can and must supplement these with good investment choices. However, we need to realize that there are practical limits to the speed of return that we can earn from our investments on a sustained basis.
And if the factors made earlier are anything to go by, we have limited control over the return that we will end up getting. Putting all this together, I would like to claim that a scheme’s returns are not as consequential as most of us might believe. But I’ll let you be the final judge of that. And along with what I have, up to now, shared in this article, I’d prefer to give you a parting thought that putting a complete different spin on the question in the name.
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Most good stuff in life come at a cost. Generally speaking, the greater important something is to us, the bigger is the price that we are willing to pay. Conversely, the higher the price that we are willing to pay for something, the greater important it could be regarded as to us.
Thus, the importance of a scheme’s returns to us can well be judged by the price we would be willing to pay or, more accurately, the compromises that people are ready (or not prepared) to make. I want to explain with a personal example. I’ve used a stance never to make investments my money with HDFC shared account. To be clear, I’ve great respect for their Chief Investment Officer as an equity fund manager. I have no reason to doubt his ability to generate better returns than the majority of his peers. On the flip side, I have regarded their disclosures around expense ratios as inconsistent and opaque.