Mutual Funds That Consistently Deliver 10% Annual Returns

3 Jan 2025 , 11:32 AM

Is it possible to get 10% annual returns on MF investments? Financiers often ask the question, and the answer is a little more nuanced than just a simple yes or no. The piece explores the realities of this attractive return target, considering the factors that influence MF performance and what investors should realistically expect.

The Allure of Good Returns

Generally speaking, 10% annual returns on MF are often regarded as one benchmark of a successful long-term investor. When compounded over many years, this rate can grow the portfolio by astronomical proportions. However, it’s crucial to understand that consistently achieving this level of return long-term is extremely challenging, if not impossible.

Reality of Market Fluctuations

The stock exchange, where most mutual funds invest, is inherently cyclical. It experiences periods of growth, called bull markets, and periods of decline, known as bear markets. Such fluctuations make it very hard for any fund to repay steadily every year. Some years will see 10% annual returns on MF and more, while others may see a decline.

Average vs. Consistent Returns

It is very unlikely to achieve consistent MF returns of 10%. However, many well-managed mutual funds can achieve a considerable average annual return over a longer period, say, a decade. This means that while some years will be lower or even negative, others will be much higher, averaging around 10% over the long haul.

Factors Affecting Mutual Fund Returns

The following factors can influence the returns from a mutual fund:

• Market Conditions: General stock exchange performance is highly influential for fund returns.
• Skilled expert: A good fund manager with expertise can make strategic investments for a better return.
• Investment Strategy: Different funds have different objectives, which affect the performance.
  Expense Ratios: The more expensive they are, the more they will burn through.

What to Look for Instead of Consistent 10% Returns?

Instead of looking for even returns, investors must look for the following:

• A Long-Term Track Record: Ideally, a record of 10 years or more is quite valuable in terms of understanding its performance across market cycles. Search for funds continually outperforming their benchmark index over a long period.
• Risk-Adjusted Returns: Raw returns are not the full picture. A fund may have high returns, but those returns can come at a very high cost. Risk-adjusted return metrics like the Sharpe and Sortino Ratio calculate how much return it generates for each unit of risk taken.
• Consistent performance relative to the peers: Compare a fund’s performance with its contemporaries in the same category.
• Low Expense Ratios: In expense ratio parlance, this pertains to the annual charge assessed by a fund to offset its operating costs. These fees directly reduce your return. Even a minuscule difference in expense ratios has significantly impacted long-term returns simply because of compounding power.

Keeping realistic expectations

The key to successful Mutual funds’ annual returns is being rational. While it is perfectly natural to aim higher, market fluctuations cannot be avoided.

One cannot reasonably expect exceptionally high and consistent MF returns year after year. The emphasis should be on creating a diversified portfolio of well-managed funds and adopting a long-term investment horizon.

For example, a SIP is far more likely to end positively than chasing short-term gains or attempting to time the market. These are notoriously tricky and often detrimental to more extended returns.

Summing up

The notion of achieving a 10% annual return on MF is alluring. However, in practice, expecting it to perform perfectly with market volatility is rather difficult. What should be targeted is long-term growth and consistent investing to fulfil one’s goals under the expert guidance of a financial advisor.