"What's a good return on mutual funds?" I hear this all the time. People want a number, something they can hold their fund up against. But any single number would mislead you. A "good" return for a liquid fund is completely different from a good return for a small cap fund. And a return that looks great after one year might look ordinary after five. So instead of a magic number, here's how to judge whether your mutual fund returns are actually good.
Why there's no single number
Different funds do different jobs. A liquid fund is meant to be steady, not exciting. An equity fund is meant to grow over many years, with big swings along the way. Comparing them is like comparing a scooter with a truck. And returns change with market conditions. A strong year can make every equity fund look brilliant; a bad year can make the same funds look terrible.
Keep this in mind. That's why no regulated fund can promise a return, and why you should be wary of anyone who quotes you one. Be very wary.
Test 1: does it beat inflation?
The first basic question is whether your money is growing faster than prices. If it isn't, your money is losing buying power even though the number is rising. Over long periods, growth assets like equity funds aim to stay comfortably ahead of inflation. Short-term debt funds aim to keep pace while staying steady.
Our page on inflation and your savings explains why this matters.
Test 2: does it beat its benchmark?
Every fund has a benchmark index. For an active fund, a good return means doing better than that benchmark over several years, after costs. If the benchmark rose a lot and your fund rose less, it lagged, even if the number looks nice.
Our pages on the benchmark and TRI explain how to compare fairly.
Test 3: how does it compare with similar funds?
Look at funds in the same category. If most of them did better than yours over five years or more, that's worth noticing. If yours is consistently in the better half, that's a good sign. One year at the bottom isn't a crisis. Several years is.
Test 4: is it on track for your goal?
It matters most. This is the one that matters most to you. The real question isn't "is this return good?" but "is my money on track for what I need it for?" A fund with modest returns that reliably funds your child's education is doing its job. A fund with flashy returns that you'll panic-sell in the next fall isn't.
Our guide on how to set financial goals explains how to check progress.
Measure the right way
For SIPs, the return shown as "absolute return" can be misleading, because each instalment went in at a different time. XIRR is the better measure, because it accounts for the timing of every investment.
Our page on XIRR explains it simply, and our XIRR calculator lets you check your own.
Look at long periods
Be patient here. Judge equity funds over five years or more, not one. Short-term returns are mostly noise. Rolling returns, which show how a fund did across many different periods, give a far better picture of consistency.
Our page on rolling returns explains how to read them.
Consider the risk taken
Two funds with the same return aren't equal if one took far more risk to get there. A fund that delivered decent returns with smaller swings is often better for most investors than one that got slightly more with wild ups and downs.
Our page on Sharpe ratio and standard deviation explains how risk-adjusted returns work.
Don't forget costs
The returns you see are already after the fund's expense ratio. But between two similar funds, a lower cost leaves more with you over time. It's one of the few things you can control.
Our page on expense ratio explains how costs work.
Red flags when someone talks about returns
- A specific high return "promised" for the future.
- Only last year's return shown, never five or ten years.
- Comparisons with the wrong kind of fund.
- Absolute returns used for SIPs instead of XIRR.
- Pressure to switch because another fund "did better".
Our post on how to spot an investment scam covers more warning signs.
What to do if your fund disappoints
First, check the time period. Is it a short-term dip, or has it lagged its benchmark and peers for several years? If it's short-term, usually stay patient. If it's long-term and there's no good reason, a calm review and possibly a switch may make sense, after checking exit loads and tax.
Our page on when to sell a mutual fund gives a framework.
A quick example
Suppose your flexi cap fund rose a fair amount over five years, and you feel unsure whether that's good. Check three things. Did it beat inflation over those years? Comfortably, yes. Did it beat its benchmark? Slightly. Did it do better than most flexi cap funds? Around the middle. Conclusion: a reasonable, steady fund doing its job, nothing to panic about and nothing to brag about. That's what most good funds look like most of the time.
Expectations by fund type
Set expectations by what each fund is built for. Liquid and overnight funds aim for steady, modest growth with very little movement. Short-term debt funds aim a little higher, with small swings. Hybrid funds sit in the middle. Equity funds aim for the highest long-term growth, but can fall sharply in bad years and need patience. Judging a liquid fund by equity standards, or the other way round, will always disappoint.
Short version? Match the yardstick to the job.
Your behaviour shapes your return
Here's something the fund's numbers don't show. The return you actually get depends heavily on what you do. Investors who stop SIPs in falls, chase last year's winners or switch often usually earn less than the funds they own. The fund's return and your return can be very different things.
Our post on why people stop their SIP explains how to avoid this gap.
Comparing with friends and family
Someone at a family function will always have a fund that "gave much more". Maybe it did, over one particular year, in one particular category, measured in one particular way that conveniently ignored the years it fell, the money they put in at the top, and the fact that their goal and time frame are nothing like yours. Smile, nod, and check your own fund against the tests above instead. Our post on why your friend's fund did better explains what usually lies behind these stories.
The bottom line
A good mutual fund return isn't a single number. It's one that beats inflation over time, holds up against its benchmark and similar funds, fits the risk you're comfortable with, and keeps your goals on track. Judge it over years, measure it with XIRR, and let your own patience do the rest.
If you'd like help judging whether your funds are doing their job, I'm happy to go through them with you. Myfolios is an AMFI-registered mutual fund distributor (ARN-145870) working from Indore since 2014. Get in touch.
