2017 Indian Mutual Fund Heatmap

The Year in Asset Class Returns (and the case for Diversification)

Historical Returns

2017 was a great year for Indian Equities, the best since the staggering returns of 2014. The heat-map below shows the historical % returns of each Mutual Fund investment category over the last 10 years.

Calendar Year Returns 2017 (green = great, red = poor)

In 2017, fixed income categories delivered dramatically poorer returns than equities as an investment. The lacklustre performance of bonds was driven by a pick up of inflation toward year-end, oil prices trading at near 3-year highs and the possibility of increased fiscal deficits.

Monthly Returns 2017

Annualised Returns over a cycle

All of us invest for specific life goals — buying a house, saving for our child’s education, building a nest egg for retirement, or even just a general growth in our personal wealth. So its important to see how our investments perform over much longer periods and not just a year or two.

First-time investors into equity funds in 2017 should not get carried away by the spectacular returns of 2017 — the equity market’s performance is less impressive on a longer-term basis. Equity large-cap funds have delivered only 10% over the last 7 years vs 30% plus returns in 2017.

Annualised Returns, end-2017

While calculating returns, both the start and end-dates are important. The same returns heatmap looked very different at the end of 2015. Fixed income (bonds) had outperformed equities and were preferred by most investors.

Annualised Returns, end-2015

And before they began their spectacular run up since 2014, small and mid-cap equities looked like a poor investment — similar historical returns to large-cap equities with much, much higher volatility.

Annualised Returns, end-2013

And just six years ago, at the end of 2011, following a horrible year for equities during the peak of the European financial crisis, “gentlemen preferred bonds” and the best asset class in the flight to safety was gold!

Annualised Returns, end-2011

Creating long term wealth: Equities still the best asset class

There is no doubt whatsoever that equities have been the best asset class for creating wealth in India over the long term. A SIP of just Rs 1,000 per month large cap equity funds has multiplied 3.4x in the last 15 years (vs approx. 1.7x in most of the fixed income categories).

Growth of Rs 1000 SIP over time

The importance of Diversification

Everyone wants to be invested in the best-performing category each year. The thing is, few of us are savvy enough to consistently pick the best. The charts above illustrate that just because an investment category outperforms in one year, there is no guarantee that it will outperform in the next. That’s why diversification is key, and helps us stay emotionally calm over the long term investment journey.

Happy investing!

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