This article delves into the ‘XIRR’ or extended internal rate of return and how it can be the best way to arrive at the returns on your portfolio that is unique to you, because two people can invest in the same fund but have very different returns.
In this article, we’ll explore where risk premiums come from in debt and equity. This is important because risk premiums are not fixed and change with time. So, if you base your return expectations wrong, you may wind up with a different corpus that you originally planned to.
The last two years of turmoil in the debt fund space may have left you wondering what returns to expect from debt funds. Will debt funds beat FD? Or would their returns hover somewhere around their yield (yield to maturity) as promised by some? Are double-digit returns possible in debt? Use this analysis to set more realistic expectations from debt funds instead of a vague 8% or 9% return you may have in mind.
In recent times, you may have read about stories of equity indices or equity mutual funds struggling to deliver double digit returns even over 3 and 5-year periods. If many of you had expectations of say 12% return or a 15% returns these numbers are indeed disappointing.
But here’s a question: how did you form your return expectation? I posed this question to some friends. Their response can broadly be categorized into two: one, they either read or were told that equity markets can deliver 15-20% returns. Two, at some point in the past, some of the stocks they held had delivered this return and it naturally became the ‘best return to expect’.
So, what is the right way to form your returns expectation? How much should you expect from your portfolio? Why is that important?
Pick up any equity fund today and the 1-year return looks absolutely uninspiring. 8%? 9%? 11%? Losses? Where is that bumper equity return? But if