What is a Good return on your Investment?

By
Manikaran Singal
-
good returns on your investments

Good Returns? Of course, more is always better. This is the common answer by investors. No one wants to settle for less.

Nowadays everyone wants to maximize the returns. Optimizing the portfolio, beating the Inflation, generating tax efficient returns in a portfolio has become the things of passe’. Expectations have changed a lot.

When I answer the readers’ queries on Money Control, every other investor is asking for “Good Returns”.

Good Returns or Bad Returns, High or Low returns are something that is derived from Comparison between different products, different time periods, different Investors portfolios or how the numbers are tortured to speak the language of the product seller.

For example, ULIP returns are shown as portfolio returns, but the investor returns differs a lot, due to GST on Premium payments as well as the Mortality and other expenses which vary in different age groups.

Mutual funds are pitched or even looked at for the last few years’ performance, sometimes even last 1 years’ returns are enough for the Investors to make investment decisions, without understanding the inherent risks in it.

We the irrational human beings are loss averse, not risk averse, which makes us continue with the high risk and expectedly high return Mutual funds/Stocks Portfolio (Market Risk), Endowment insurance policies which would not even beat the long term inflation rate (Inflation Risk), lower rated but high yielding debt instruments (Credit Risk), High allocation to Real estate (Liquidity Risk).

“The Essence of Investment Management is the management of Risks, not the Management of Returns ‑ Benjamin Graham”

What are Good Returns?

Good Returns according to me are neither what you see as a past performance of the product which itself is not guaranteed, nor what is promised to you by the product manufacturer or product seller.

Good Returns are the reasonable returns expected after looking at the cost of the product, Average Inflation rates and Taxation of the Investor. If the Post expenses, and Post tax returns of the product is higher than the Average rate of the Inflation, you are getting good returns.

How to generate Good returns on your investments?

Understand how Asset classes work

There are 4 investment asset classes to invest in India – Equity, Debt/Fixed Income, Gold and Real estate. (Read: 10 Reasons, why real estate investments are riskier than equity?)

All the asset classes have its own features and all carries some importance in a portfolio. Allocate assets as per your goals and risk tolerance, and stick with it. (Read: What is Equity?)

Have a goal based financial plan and structure at place

A structured financial Plan helps you have a holistic view on your finances and requirements. A good financial plan takes into account your cash flows, your goals, your risk profile, your existing investment structure, your taxes and even the distribution planning.

Take help of professionals

If Virat Kohli is the best captain and batsman, then why does he require a coach? Because, even the best requires guidance and monitoring.

(Read: what is the role of a Financial planner?)

Conclusion:

Investments are not only about good returns. And neither good returns are about high-risk Investments. You have to follow a process and good returns are the by product.

Numbers can deceive. Your requirements should guide the process.

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10 COMMENTS

  4. “What is Good return on investment”.
    Fundamentally, any return should first of all, protect our money and second should generate reasonably good return.
    Again, the question is “what is good return on investment”?
    To me, very simply put without any complexity and jargon, if one can earn more than ( more by say, 2 to 4% p.a.) nominal GDP growth of our country, I think he is making huge money. Even if, one is making at par with the nominal GDP growth of our country, I think he is making reasonable money.
    Any thing, less than nominal GDP growth, means, you are not making enough money to compensate for the inflation as well as the general GDP growth of a country.
    So in today’s context, taking with inflation around 4 to 5% and GDP growth at around 7 to 8%, one should at least make 12 to 13% return on his investment. This is after taxes. Anything more than this of course, is a bonus for which one should rejoice and celebrate.
    This is a non-complex and crude way to understand this theory, but this theory has withstood the test of time since centuries.
    Of course, more savvy and intelligent people earn more because they know where to invest, when to enter and when to exit and may also have some complex tax planning so as to earn more after tax.

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