‘Return’ is the first word that comes to mind whenever you hear about an investment option. Return is the measure of performance and efficiency of an investment option. Everyone wants an investment with a better return potential but with underlying risk associated with the same.
Every investment gives return in different ways. Savings and bonds give return in the way of interest. Stocks and mutual funds pay out dividends. Instruments like stocks, bonds, mutual funds and ETFs also appreciate in value and provide capital gains when sold.
What is a ‘good’ return on your investment?
Everyone wants to get good returns. What is good to one may not be good enough for another. Categorization of good and not-so-good returns are derived from comparative analysis. Returns of various products are compared in consideration with features, time horizon and investor portfolio.
- Benchmark performance:
For example, mutual funds are compared based on their previous performances and their benchmarks. If a mutual fund is able to derive a sustainable and good alpha, i.e. performance over its benchmark, while keeping the beta (risk) low, then it is a “good” return. A benchmark is a standard set against a mutual fund so that it can be measured. Since 2012, SEBI has mandated mutual fund houses to have a benchmark to measure its relative performance. For example, if the Sensex has given a return of 12.65% in the last three months and a particular mutual fund has given 14.75% annualised return, then the relative performance is 2.1% more than its benchmark.
- Past performance:
Previous performance is often considered while making future investment decisions. It may not be the all-important feature, but you should give it a look before opting for a specific fund.
- Consistent Returns:
Some say that penny stocks can provide “good” return. But so is gambling -- if you get lucky. But what if you don’t? That’s where “good” investments come into play. “Good” return is consistent returns over a longer tenure.
Not just returns!
Returns are surely important but it is not the only factor that needs to be considered. Higher the return expectation, higher the risk. So, if you are not too keen on taking too much risk in your investment portfolio, then you would have to settle for lower returns and vice versa. If you need high returns, you must accept the volatility of your investment portfolio.
However, if you have time on your side, you can opt for high returns without risking your portfolio since the time horizon eases out market fluctuations.
So, to generate a good return, it makes most sense to consider all the following points of investing fundamentals mentioned below.
✓ Selection of right investments based on one’s risk appetite, investment goals and asset allocation
✓ Understanding before investing
✓ Having a long-term perspective for investment goals fulfilment
✓ Diversification of investment portfolio
Returns are important but it is not the be all and end all of investments. It is more important to stay disciplined because it can help you to achieve your financial goals
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.