If you’ve spent time on social media or watched any financial influencers recently, you’ve probably heard claims like "You can make 12% annual returns from mutual funds!" It sounds tempting, right? After all, who wouldn’t want to invest their money and get steady, guaranteed returns each year?
But here’s the reality: those 12% returns are not guaranteed each year, and it’s not as simple as getting a steady 12% annual growth. What these influencers are referring to is the average return over many years, which smooths out the ups and downs of the market.
In this article, we’ll break down exactly what those influencers mean, how mutual fund returns actually work, and why the journey to achieving that average 12% return is a bumpy ride. If you’re looking to grow your wealth, this guide will help you understand the reality of mutual fund investing.
Expectation vs. Reality: The 12% Return Myth
Expectation: Steady 12% Growth Every Year
When you hear influencers say you can make 12% returns from mutual funds, it’s easy to imagine that you’ll get 12% growth every single year, like clockwork. Many first-time investors believe that by investing in mutual funds, they can set their money aside and watch it grow by a consistent 12% each year.
Reality: The 12% Is an Average, Not a Guarantee
In reality, mutual fund returns are not fixed or guaranteed. That 12% figure is an average return over many years. What does that mean? It means some years your investment might grow by more than 12%, while in other years it could grow by much less, or even lose value. Over time, the ups and downs average out to around 12%, but the ride can be bumpy.
For example, you might see:
A 20% gain one year
A 5% loss the next year
A 15% gain the year after that
Over a long period (like 10 or 20 years), these varying returns average out to around 12%, but there’s no guarantee that you’ll get exactly 12% in any given year.
How Mutual Funds Generate Returns
To understand why mutual fund returns aren’t fixed, let’s break down how these funds generate returns.
Components of Mutual Fund Returns:
Stock Market Performance: The primary driver of returns in equity mutual funds is the performance of the stock market. Stocks are volatile by nature, and their prices fluctuate daily based on market conditions, economic events, and company performance.
Dividends: Some companies pay out dividends to shareholders, which adds to the return of a mutual fund. However, dividends can vary from year to year.
Capital Gains: Mutual fund managers buy and sell stocks within the fund. If they sell stocks at a higher price than they bought them for, the fund earns capital gains. But this also depends on market conditions.
Because of these variables, mutual fund returns are inherently unpredictable in the short term. Some years will be great, and others may be disappointing, but over time, the market tends to go up, leading to positive long-term returns.
Why the "12%" Is an Average Over Many Years
The 12% figure often cited by influencers is the historical average return of the stock market or specific mutual funds over a long period. In India, equity mutual funds have historically provided average annual returns of around 12% over the past 10-20 years, but those returns are far from consistent year by year.
Here’s how it works:
The stock market doesn’t grow at a steady pace every year. Some years will see rapid growth, while others may see a decline.
Over a long period—say 10-15 years—the high returns and the low returns balance out, leading to an average return of around 12%.
Real-life Example:
If you invested ₹1,00,000 in an equity mutual fund 10 years ago, you might have seen years where your investment grew by 25%, and other years where it shrank by 5%. But after 10 years, your investment might have grown to ₹3,10,000, representing an average annual return of about 12%.
Key point: You won’t see 12% growth every year, but over the long term, your returns may average out to 12%—if you stay invested through the highs and lows.
Understanding the Ups and Downs: Why Some Years Are Better Than Others
Factors That Affect Mutual Fund Returns:
Economic Cycles: Stock markets go through cycles of expansion (growth) and contraction (recession). During periods of economic growth, stock prices rise, but during recessions, they tend to fall.
Global Events: Events like the COVID-19 pandemic, wars, or natural disasters can cause sharp declines in the stock market, impacting mutual fund returns.
Market Sentiment: Investor behavior, driven by fear and greed, plays a significant role in stock market fluctuations. When investors are optimistic, stock prices rise, and when they’re pessimistic, prices fall.
Company Performance: The individual performance of the companies within the mutual fund also impacts returns. If a key company in the fund underperforms, it can drag down the overall returns.
Example of Market Volatility in India:
2017-2018: The Indian stock market saw strong growth in 2017, with many mutual funds delivering over 20% returns. But in 2018, the market faced significant corrections, and many funds saw negative returns.
2020-2021: During the COVID-19 pandemic, the market initially crashed in early 2020, but by the end of the year and into 2021, it rebounded strongly, rewarding those who stayed invested.
Lesson to learn: The stock market is unpredictable in the short term, but over the long term, it has historically delivered positive returns.
The Role of Compounding in Mutual Fund Returns
One of the reasons mutual funds can generate impressive long-term returns is the power of compounding. Compounding means that your returns generate their own returns, leading to exponential growth over time.
How Compounding Works:
When you earn a return in the first year (whether it’s from capital gains or dividends), that return is added to your original investment.
In the following year, your returns are calculated not just on your initial investment but on your new total (initial investment + first year’s returns).
Over time, this process repeats, and your money grows exponentially.
Key point: Compounding takes time. The longer you stay invested, the more powerful compounding becomes, and the higher your potential returns.
Example:
If you invest ₹1,00,000 in a mutual fund that provides an average annual return of 12%, your investment could grow as follows:
After 5 years: ₹1,76,230
After 10 years: ₹3,10,580
After 20 years: ₹9,64,630
Note: This assumes an average return of 12% over the long term, but in reality, you’ll likely see both higher and lower returns along the way.
Why Staying Invested Is Key to Achieving Long-Term Returns
Given the market’s volatility, one of the biggest mistakes investors make is panic selling when the market drops. Selling during a downturn locks in your losses and makes it much harder to achieve long-term growth.
Here’s why you should stay invested:
You Miss the Rebounds: After every market crash, there’s typically a rebound. If you sell during a downturn, you miss out on the recovery that follows.
Long-Term Growth Requires Time: As we mentioned earlier, the 12% return is an average over many years. If you sell too early, you won’t benefit from the long-term growth potential.
Emotional Decisions Lead to Losses: Reacting emotionally to market drops often results in selling low and buying high, which is the opposite of what you want to do.
Solution: Stay disciplined and patient. Trust that the market will recover and that staying invested is the best way to achieve your financial goals.
Trusting Sampann to Help You Navigate Mutual Fund Investing
If the ups and downs of mutual fund investing seem overwhelming, you’re not alone. That’s where Sampann can help. Sampann provides expert financial planning tools and insights to help you stay disciplined, avoid emotional decisions, and achieve your long-term financial goals.
Here’s how Sampann can help:
Personalized Financial Plan: Sampann creates a tailor-made investment plan based on your goals and risk tolerance, ensuring you’re on track for long-term success.
Automatic Rebalancing: Sampann automatically rebalances your portfolio, adjusting your investments to keep you aligned with your financial goals.
Goal Tracking: With Sampann, you can track your progress toward your financial goals, ensuring you stay on course even when the market is volatile.
Download the Sampann app today and take control of your financial future.
Final Thoughts: The Reality Behind the 12% Return Claim
When influencers say you can make 12% annual returns from mutual funds, they’re referring to the average return over many years, not a guaranteed return every year. The reality of mutual fund investing is that it’s a long-term game, full of ups and downs. But if you stay patient, disciplined, and invested for the long haul, you can potentially achieve those average returns—and grow your wealth significantly.
If you’re ready to start your journey toward financial success, Sampann is here to help.
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