When it comes to growing your wealth through stocks market, high return mutual funds seem like the obvious choice for the most Indians. The growing size of AUM (Assets Under Management) of Indian Mutual Fund Industry confirm this trend. As per AMFI, the AUM of the Indian MF Industry has grown more than 6 fold in a span of 10 years from 2014 to 2024 rising to ₹68.08 trillion.
But before you get carried away by glossy numbers, it’s essential to take a step back and look at the bigger picture. High returns don’t always mean a better investment choice, and there are compelling reasons to consider alternatives. Indeed, a personalized approach to investment might suit your financial goals more effectively and provide better returns than high return mutual funds. In this article let’s explore how you can benefit from a personalized investment choice.
The Fallacy of High Return Mutual Funds
Many investors are drawn to mutual funds with the promise of high returns, but this can be misleading. While mutual funds do offer the potential for steady growth, the reality is that these returns are not guaranteed and often come with hidden trade-offs. For example, equity mutual funds in India have delivered an average return of 12-15% annually over the last decade.
However, these figures don’t account for market volatility, fund management fees, or underperformance during economic downturns.
A study by SPIVA (S&P Indices Versus Active) in 2023 revealed that 65% of actively managed equity mutual funds underperformed their benchmarks over a five-year period. This means that even when you invest in high return mutual funds, there’s no assurance you’ll achieve returns exceeding market averages.
Volatility increase the risk
High return mutual funds often come with a catch: they carry significantly higher risks. Many mutual funds are vulnerable to sudden market corrections and can experience wild price swings. For example, during the COVID-19 market crash in 2020, equity mutual funds in India lost an average of 25-30% in value within months.
According to a 2023 report, highest return mutual funds also showed a 20% higher standard deviation than average funds, indicating much greater volatility.
If you’re chasing high returns, you need to ask yourself: can you handle the downs as well as the ups? During market downturns, these funds can erode your wealth just as quickly.
Associated Costs Erase Your Gains
The heavily publicized high returns often blind investors to another important consideration: the costs associated with these funds. A mutual fund investment involves a number of fees and charges such as Entry Load, Exit Load, Transaction Charges, Portfolio maintenance, management charges, distribution and service fee, collectively known as expense ratio.
High return mutual funds come with high expense ratios, which can range from 1.5% to 2.5% annually. While this might seem like a small percentage, over the years, these costs can significantly eat into your overall returns. For instance, on an investment of ₹10 lakhs over 10 years with an annual return of 12%, an expense ratio of 2% would cost you about ₹2.0 lakhs in fees alone. This reduces the actually realized return for you as an investor.
Mutual Funds Are Not Personalized; They Are Designed for the Masses
Mutual fund managers aim to create portfolios that balance risk and return for the average investor. When you invest in mutual funds, you’re essentially joining a collective pool managed for broad appeal. Mutual funds are structured to cater to a large group of investors with varying goals and risk appetites. While this approach ensures accessibility and simplicity, it often sacrifices the personalized touch that can maximize your returns based on your unique financial profile.
For instance, the average return for equity mutual funds in India over the last five years has been around 12-15%. While this might seem attractive, it doesn’t necessarily align with individual aspirations or specific timelines. For high net worth individuals (HNIs) or those with distinct financial goals, such a generalized strategy may fall short of expectations.
Furthermore, mutual funds are subject to market trends and economic cycles, often leaving little room for tailored strategies. A report by CRISIL in 2023 highlighted that nearly 40% of mutual fund schemes underperformed their benchmark indices over a five-year period. This underlines the challenge of meeting individual expectations within a mass-oriented framework.
As outlined above, while high return mutual funds are grabbing headlines, they’re not always the best investment for every individual. Factors like risk levels, volatility and actual realized return, and associated costs spoil the lucrative high return mutual funds. If you’re looking for a smarter way to grow your wealth, it’s time to think beyond traditional options and look at alternative investment options.
How Alternative Investments Outperform
When financial markets experience turbulence, traditional investments like stocks and high return mutual funds often bear the brunt of volatility. In contrast, alternative investments frequently shine more often as stable and rewarding option. Alternative investments span a wide range of categories such as commodities, hedge funds, angel investing, private equity, venture capital, crypto currency, exchange rates, and collectibles among others. No wonder then that many of HNIs worldwide allocate a significant portion of their wealth to alternative investments – a better investment than high return mutual funds.
Real Value Appreciation and exponential returns
Many of the alternative investments have delivered steady returns during market volatility, even during economic downturns. Investing in early-stage startups has yielded substantial returns, as evidenced by several Indian companies. Examples of likes of Flipkart, Lenskart, Instagram, Facebook, Whatsapp Swiggy are plenty.
Many of such startups have given astronomical returns, ranging up to 1000%, for early stage investors. Soaring valuations have far outweighed the Returns on Investment (RoI) compared to high return mutual funds.
Have a look at examples of high returns for early stage startup investors
Insulation from market volatility
Alternative investments are known for their ability to diversify your portfolio beyond traditional stock market assets. These alternative investments are fairly insulated against direct fluctuations of the stock market in contrast to high return mutual funds.
For example, during the 2008 global financial crisis, while the S&P 500 plunged by nearly 38%, hedge funds—a popular alternative investment—declined by only about 19%, according to the Hedge Fund Research Index. This reduced loss highlights the defensive qualities of alternative assets in challenging times. By incorporating these assets, you can mitigate risks while positioning yourself for potential long-term gains.
Lower Access Costs
In contrast to high return mutual funds, alternative investment opportunities often involve lower ongoing costs. For example, investing directly in early-stage startups for equity stake not only gives you the opportunity to participate in their growth but also has negligible recurring expenses. This ensures that, as an investor, the entire value gain is equal to actual RoI (Return on Investment) for you.
Balancing Risk and Reward
It’s important to note that while alternative investments offer unique advantages, they’re not without risks. Illiquidity, higher minimum investment requirements, and a longer time horizon can be challenges for some investors. However, by searching for specific avenue for investment, these barriers can be either lowered or eliminated, making alternative investments more accessible than ever.
Personalized Investment Strategy
Financial growth isn’t just about chasing high returns; it’s about crafting a portfolio that aligns to you as a person. To get better value for your investment, you should consider personalized investment strategy. A personalized strategy takes into account your investment size, your risk profile, your growth expectations, your lifestyle aspirations and suitability of the investment offering. It is, essentially, a path tailored for you to Financial Growth and Wealth Building for you.
Why One-Size-Fits-All Doesn’t Work for Everyone
Every person is in different situation, has different outlook, and has diverse financial objectives. These can vary among financial growth, wealth preservation, securing future, planning for major life events, wealth building, tax planning, or lifestyle aspirations and so on.
Generic mutual funds, or specifically high return mutual funds, often fail to cater to such specific needs. According to a report by Knight Frank, 64% of HNIs prefer alternative investments due to their potential for personalization and higher returns over time.
Unlike high return mutual funds, personalized investment strategy allows you to focus on what matters most to you.
Case Study: Personalized Investment vs. High Return Mutual Funds
Consider an investor with Rs. 5 lac to allocate and having general risk tolerance. A traditional portfolio approach might suggest putting 70% in mutual funds and 30% in bonds. Over a decade, this allocation could yield a 6-10% annual return, depending on market conditions.
However, by adopting a personalized approach, the investor could allocate:
- 30% to real estate for steady rental income and capital appreciation
- 30% to tax-efficient bonds and debt instruments
- 20% to blue-chip equities for steady growth and liquidity
- 20% to private / startups equity for exponential growth and value appreciation
By including the startup equity the potential overall return could soar to as high as 20% for the portfolio. A personalized strategy not only outperforms traditional allocation but also aligns with the investor’s specific goals.
The Role of Emerging Opportunities in Personalized Strategies
Many investors are increasingly drawn to emerging opportunities that promise high growth potential. These investments, while riskier, often outperform traditional high return mutual funds in the long run.
For instance, early-stage startup investments offer access to future equity in new-age businesses. With startups projected to contribute over $1 trillion to India’s economy by 2030, such opportunities present a compelling case for inclusion in a personalized portfolio.
Leveraging Private Equity for Superior Returns
Investors seeking high return investment opportunities can explore private equity as an alternative investment option. It is a powerful instrument for rapid wealth creation. Private equity investments, while less conventional, have proven to deliver substantial returns, often outpacing high return mutual funds.
What Is Private Equity and Why It Matters?
Private equity refers to investments in privately held companies, ranging from startups to established firms not listed on public stock exchanges. These investments typically involve acquiring equity stakes, helping businesses scale, innovate, or restructure. Unlike mutual funds, which spread risk across various public assets, private equity focuses on strategic, high-potential growth opportunities.
The returns on private equity investments often dwarf those of public markets. According to McKinsey’s 2023 Private Markets Review, private equity funds generated an average internal rate of return (IRR) of 20% over the last decade. This far surpasses the average annual returns of most high return mutual funds, which typically hover around 10-12%.
The Appeal of Long-Term Value Creation
Private equity thrives on a long-term approach, targeting businesses with scalable potential. While mutual funds prioritize liquidity and short term market trends, private equity focuses on building sustainable growth over years. This focus allows investors to participate in transformative business journeys, reaping significant rewards.
For example, startup like Flipkart delivered extraordinary returns to early private equity investors when Walmart acquired a majority stake. Investing in early-stage starups offers a chance to gain equity in startups poised for exponential growth. With these investments, you’re not just funding a business; you’re becoming part of its success story.
Resilience in Volatile Markets
Private equity’s insulated nature shields it from public market volatility. When stock markets fluctuate, mutual fund NAVs (Net Asset Values) often plummet. In contrast, private equity investments are evaluated based on company performance, not daily market movements. This resilience provides a steady anchor for portfolios during economic turbulence.
For instance, during the 2008 financial crisis, private equity funds outperformed public markets, showing an IRR of 12% compared to the S&P 500’s -38.5% decline.
Exclusive Access to High-Growth Opportunities
Private equity grants access to niche, high-growth sectors unavailable to common investors. Whether it’s a ground breaking technology, digitization of existing processes, improving user experiences, or manufacturing innovation, private equity investors are often the first to capitalize on emerging trends. Mutual funds, constrained by regulatory and liquidity requirements, rarely match this agility.
The Rise of Early Stage startup Equity
Investing in early-stage startups is one of the most exciting niche for alternative investment today. Unlike public companies, startups operate with agility, adapting quickly to changing economic conditions. With this asset class, you gain access to future equity in promising startups. You’re not only diversifying but also tapping into high-growth opportunities. These can outperform even the highest return mutual funds. Unlike mutual funds, where you’re a passive participant, startup investing can also let you be part of a company’s growth journey.
According to the Indian Angel Network, the number of angel investors in India has grown by 40% annually since 2020. This trend reflects a growing appetite for startup investments as a viable alternative to traditional markets. While risks are higher, the rewards can be life-changing, with some startups delivering returns of 10x or more. There are plenty of examples wherein investors have made significant returns by buying stake in early stage startups.
Read more about real life examples of investment with high returns.
Challenges and Mitigation Strategies
Of course, private equity isn’t without risks. Limited liquidity and long lock-in periods can deter some investors. Additionally, identifying high-potential investments requires expertise and due diligence. However, these challenges can be mitigated by researching a little and undertaking a simple process of vetting opportunities.
A step-by-step guide to identify the right startup for you to invest is furnished here.
Why Private Equity Could Be Your Next Move
In the world of investments, sometimes the best choice isn’t the one promising the highest returns, but the one aligning perfectly with your long-term goals. If you’re searching for a better investment than high return mutual funds, private equity offers a compelling case. Its combination of high returns, market resilience, and access to exclusive opportunities makes it an essential consideration for smart investors with modern outlook. Consider opportunities which allow you to invest in future equity in specific early-stage startups.
With a right early stage startup, you can invest in private equity, with the potential to redefine industries and gain exponential returns. We suggest having a look at such an opportunity, InvestIN, here.
