Hey , I see 10 Year CAGR of a mid cap fund is around 25%. Is this really possible to continue for next 25 years ?

Ans: Past returns like 25% CAGR over 10 years may seem impressive. However, expecting the same performance for the next 25 years can be unrealistic. There are multiple factors that impact returns over time, and it is crucial to manage expectations accordingly.

Below are the key aspects to evaluate:

Market Cycles and Volatility
Equity markets move through various phases: growth, correction, and recession. A fund performing well during a specific period may struggle in another.

Mid-cap funds can deliver high returns during bullish phases but tend to correct steeply during market downturns. Expecting a consistent 25% CAGR may ignore the role of these cycles.

Long-term investing will involve periods of underperformance, making it necessary to diversify across fund types.

Regression to Mean
Historical data shows that extremely high returns eventually normalize over the long term. This concept is known as regression to the mean.

A fund showing 25% CAGR over 10 years may stabilize closer to average market returns, possibly between 12% and 15%, over 25 years.

It is wise to assume moderate returns rather than extrapolating the past performance linearly.

The Impact of Economic and Market Conditions
India’s economic growth plays a vital role in sustaining high equity returns. While India is a fast-growing economy, external factors such as inflation, interest rate changes, and global uncertainties can impact markets.

Over such a long horizon, there may be structural shifts, policy changes, or sectoral rotations affecting mid-cap stocks. A fund that thrives today may not remain as relevant in future.

Staying updated with evolving market conditions through periodic reviews is essential.

Portfolio Diversification is Essential
Relying heavily on mid-cap funds may increase the overall risk in your portfolio. Mid-cap companies can grow fast, but they also carry higher volatility and downside risks.

A balanced portfolio including large-cap and multi-cap funds along with mid-cap funds can help reduce risk while still capturing potential growth.

Diversification protects your investments during phases when mid-cap funds underperform.

Advantages of Active Management over Passive Funds
While index funds are popular, they come with their limitations. Passive funds simply track an index and cannot adapt to changing market conditions.

Actively managed funds give fund managers the flexibility to adjust portfolios based on evolving market scenarios. This adaptability is especially crucial for mid-cap funds.

A Certified Financial Planner (CFP) can guide you in selecting actively managed funds suited to your financial goals, risk appetite, and market conditions.

Regular Funds vs Direct Funds
Although direct funds may offer lower expense ratios, they require significant time and expertise to manage effectively. You need to track market movements, fund performance, and make timely decisions on your own.

Regular funds, managed through a Mutual Fund Distributor (MFD) with CFP credentials, offer professional support. They provide personalized advice, help with asset allocation, and ensure disciplined investing.

The added guidance helps in maximizing returns while minimizing risks, which is crucial over a long horizon like 25 years.

Capital Gains Taxation on Mutual Funds
Equity mutual funds attract Long-Term Capital Gains (LTCG) tax of 12.5% if your gains exceed Rs 1.25 lakh.

Short-Term Capital Gains (STCG) tax on equity funds is 20%.

Debt mutual funds are taxed as per your income slab, whether gains are short-term or long-term.

Regularly reviewing tax implications ensures your investments are optimized from a tax-efficiency perspective.

Importance of Goal-Based Investing
Instead of chasing high returns, align your investments with financial goals. This approach helps maintain discipline during market ups and downs.

A 25-year horizon requires setting clear milestones, such as retirement, child education, or wealth creation. Adjust your asset allocation based on these milestones.

A CFP can help design a goal-oriented investment plan that aligns with your risk appetite and time horizon.

Regular Reviews and Rebalancing
Periodic review of your portfolio ensures that it remains aligned with your goals. Markets can change, and certain funds may underperform over time.

Rebalancing involves shifting investments to maintain the right asset allocation as per your financial plan.

Working with a CFP ensures that you receive timely recommendations for rebalancing to keep your investments on track.

Finally
Achieving 25% CAGR over 10 years is commendable, but expecting the same for the next 25 years may be optimistic. It’s essential to remain realistic with your return expectations.

Focus on a diversified strategy to balance risk and returns effectively. Avoid relying too much on a single fund type or past performance alone.

Use actively managed funds for better flexibility in changing markets. Professional guidance from a CFP ensures disciplined investing and optimal results.

Regular reviews, tax planning, and alignment with financial goals are key to long-term success in your investment journey.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment