We recently saw that it may not make so much sense taking a single point return (as on a particular date). Instead of looking at a MF scheme page and assuming it gives a CAGR of 12%, 14% and 13% respectively for 3, 5 and 10 years, how about actually getting a sense of how the return distribution looks like over a large set of data.
Here, I have tried to plot the return distribution for a large cap equity fund. The data is taken from AMFI website. The data is available only from 2006. I have taken 7 years data (making up for around 1750 data points) for 3-year lumpsum investment, 5 years data (1250 data points) for 5-year lumpsum, and 3 years data (around 750 data points) for 7-year lumpsum investment.
Here is the graph that we get:
Red, Green and Blue represents the 3 year, 5 year and 7 year return distributions respectively. Some points to observe: The returns are not negative (no loss of capital) in the 5 year and 7 year investments - but be aware that the data points considered are less and may not even cover one investment cycle or business cycle. But, the 7 year investment would have had investments made in the high of Jan/Feb 2008 and redeemed in Jan/Feb 2015. Still, it did give a positive return. There is 75% chance (observe the horizontal line of y-axis=0.25) that the CAGR is minimum 9% in 3 and 5 year lumpsum and 11% in 7 year lumpsum. Median CAGR is 13%, 12% and 13% respectively, means there is a 50% chance that CAGR is minumum the median amount.
25% chance that the CAGR is minimum 16% in 5 year and 7 year lumpsum investments and a minimum 20% in 3 year lumpsum investment. Also, see the shapes of the curves. The 3-yr red curve deviates widely compared to green (5 yr) which deviates more compared to blue (7 yr). Means, the volatility in terms of observed CAGR increasingly gets reduced as the holding duration increases.
The dataset taken is very minimal but you get the idea. Equity is for long term. Better to hold for a longer term!
In next post, we shall see how we can use this for comparing mutual funds.
Here, I have tried to plot the return distribution for a large cap equity fund. The data is taken from AMFI website. The data is available only from 2006. I have taken 7 years data (making up for around 1750 data points) for 3-year lumpsum investment, 5 years data (1250 data points) for 5-year lumpsum, and 3 years data (around 750 data points) for 7-year lumpsum investment.
Here is the graph that we get:
25% chance that the CAGR is minimum 16% in 5 year and 7 year lumpsum investments and a minimum 20% in 3 year lumpsum investment. Also, see the shapes of the curves. The 3-yr red curve deviates widely compared to green (5 yr) which deviates more compared to blue (7 yr). Means, the volatility in terms of observed CAGR increasingly gets reduced as the holding duration increases.
The dataset taken is very minimal but you get the idea. Equity is for long term. Better to hold for a longer term!
In next post, we shall see how we can use this for comparing mutual funds.
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