Why mutual funds have no compounding benefit?!
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- Опубліковано 12 гру 2018
- Mutual funds have no compounding benefit! Read more here
freefincal.com/compounded-ann...
Compounding is not the 8th wonder of the world and Einstein never said that!
Part 2 is here
• How to understand mutu...
Finally, someone is making sense. I was breaking my head for the past few months wondering where is "Compound Interest" when there is no "Interest" at all in Mutual funds. Thank you very much!!
It was same with me :)
Same here!
Totally the same with me!! This video makes so much sense
Same here bro...from last 2 days i was thinking about this ...mutual fund is scam
Same but still I am thinking what if he is also confused and said something wrong😅
Started watching your videos at 9 PM tonight. It's midnight now. Found a jem in garbage of a content. Such an underrated channel you have. Thank you so so very much for putting some meaningful content out there. More power to you sir. Loads of love from capital.
Thank you
@@pattufreefincal Hi sir , I have a doubt.. Even though there is no guaranteed return of 22% every year.. The 10000 amount you have shown is grown to 1 lakh..? Isn't that a compounding ?.
@@muthukrish8284 The money grows. It doesn't compound.
You are right Sir....If the market crashes during retirement time then all dreams of becoming financially free will collapse!! Example Negative 47% in 2008!!
That is why it is so important to diversify your portfolio.
Moreover you can look at how much time did it take for the market to recover after the 2008 recession and conclude for yourself.
After 12 years MF gave Rs. 1.19 lacs, whereas FD approx. in same period giving near about only Rs 22. 5 Thousand (@7%p.a.). Ultimately our aim is to make money & not compounding or returns.
True
He is trying to explain the concept of MF as we should have some knowledge before investing
True but what if the market goes down and you have 0 in account? In FD you will have the full money, right?
Atlast found channel for practical views on economic... thanks for ur knowledge sharing
Hello sir,
I choose to differ from your point of view. MFs have power of compounding interest. The returns may be fluctuating but once you have bought units at a price you can sell them at higher price and that compounds over a period of time when you continuously buy units at a cheap price and sell higher.
He is posting this video because lot of sales guys misleading people to buy mutual funds by telling that mutual funds will give compound interest. To answer your question, You are actually doing trading... If we trade, then all products is having compounding benefits... But if you are stay invested then there is no compound interest.
@@sanveddhavale143 After certain period of time, we are calculating our returns growth. That doesn't mean that we have reached that place by getting compound interest.
Compound interest means interest should get interest. Let's say I am doing SIP of 10rs. for 10 years and let's say my total investment amount is 100. I might get 50rs. at the end of 10 years. Here did my interest get interest. No. First where is my capital? Here if we calculate our growth, it will be -10% (assuming I didn't calculate)... So, my annual compounded return is -10%.
Mutual funds have compounding (not compound interest) effect on daily basis
So basically CAGR is the report card of the mutual fund and not the future growth guarantee. All we actually do in Mutual funds is trust the AMC and the fund managers looking at their past performance and give them time such that our money grows. But no one can actually predict how much money you'll get as a return.
Hi Sir its a great to Hear You and Appreciate for Educating, i agree with you about the verdict "Power of Compounding" kudos
thank you
liked ur video to help u with UA-cam algorithm. BTW why did u assume interest rates needs to be constant for compounding?
Your videos are so informative, Sir! Thank you!!!
Thank you
I just stumbled upon your videos. Subscribed to you. Must say you are really passionate about teaching. God bless. Just an advice, please drink water in between to keep yourself hydrated. Thank you. :)
Thanks for clearification
Hi Professor, I have been a regular follower of your blogs and videos for a long time now. I think this video is my favourite among them. Thanks for calling out this compounding nonsense and making clear that it is just retro fitting of CI formula, for our understanding and comparison with other products. I always had a tough time explaining it to people, now I will link them to this video! Thank you!
Thank you
So there is no compounding benefits as Mr. Buffett calls it?
Absolutely right!
In fact, if you observe, the sales / marketing experts will show the returns from a "backward calculation" based comparison only being able to present a percentage return only after it happened. But, you will never hear or see them what the growth can be after 10yrs from now, because there can be no formulae for the future, is what I think.
Superb analysis Pattu. No wonder there is a nexus between the AMCs, Distributors and other players who project annualised returns as an equivalent of the power of compounding. I wonder what is SEBI (Society for Executives of Bureaucratic India) doing about this. As usual, they sit ducks with their Guaranteed Returns (Salary of the Central Government) until some catastrophe happens.
Freefincal=real financial knowledge (no bullshit) thanks for d video pattu sir🙏
Thank you so much Respected Sir for such an Amazing Explanation..... I am watching your videos From Assam
I am not a financial advisor. I am just a retail investor. Let me ask you: What is the problem if a mutual fund doesn't have compounding effect? We may see a varying cagr every day. But, if we wait patiently till it reaches 12% and till our target amount is reached, what difference it makes if the journey is zig zag? Of course one cannot depend directly on volatile instruments for post retirement income. That is why we should have a target amount that is realistic. Once the target amount is comfortably reached, we should have the audacity to exit - should not be greedy. That's the only thing required. Isn't it?
"But, if we wait patiently till it reaches 12% and till our target amount is reached, what difference it makes if the journey is zig zag"
You are assuming you will get that eventually! Therein lies the mistake. You can get any return from +ve and -ve. Which is why the zig zag matters. Hope is not a strategy. Good luck!
@@pattufreefincal
I have been investing in SBI Bluechip Fund since 2018 and even after this month's big fall, it is still giving me 13+ % of IRR. Calculation shown is correct as I did that using Excel and several calculators. Are you saying that if I sell it now, I won't get this gain?
I am not for any kind of argument with people like you. But, honestly I didn't understand your point regarding compounding. What I want is a growth for my investment whether it is compounding year after year or not.
@@SambathikaChinthakal How do you know you will get the same return in future? Who gave you this guarantee? I also want growth for my money but I respect it enouth to not invest on the basis of hope.
Sir,You have cleared most of my doubts.
So in short to calculate the returns for mutual funds would be the ending value/beginning value over the numbers of years invested, would that be right?
Very well explained.. People don't seem to understand the purpose of this video Sir. It is not about suggesting if you should invest in mutual funds, it is just trying to educate us on what they represent and ensure we aren't fooled by misnomers. People who are familiar with instruments like FDs and know what compounding means might assume similar definition when used for mutual funds and fall into a trap.
Thank you!
thank you, eye opener 👍👍
U r correct, many people says compounding effect in mutual funds, but here in mutual funds works only on our investment , it doesn't know how much already grown.
Thanks for clarification. This helped.
Sir very nice same question I had asked prudent guy conducted seminar he told after 5 yrs the return starts for long term it will be nice he promoted
Very nicely explained. Keep it up.
Thank you Pattu sir for a beautiful video
Pattu sir. You are a legend. Even premier B-Schools Profs are not teaching this.
You are correct sir it's annualized return at the end. But after the long term MF gives the effect of compounding , (at the long end of waiting) and gives big money(assuming positive fluctuation when we come out) long-term inverters could take advantage
😂 Long time inverters
Agree, thanx for giving words to the flaw of mutual fund. Knowed something was not right the way MF are explained.
Very useful one... Thank u sir
good explanation. Still large caps in long term delivers a better money to retail investors.
I loved the way u explained the concept. All these years i was misguided by online videos. Its true we can not assume the amount we gonna get after 20yrs or so in mf with the current CAGR that fund is offering.
I am an mutual fund investor since long 25 years and also FD holder. So really I understood about power compounding worked over the period of time in mutual funds outstanding performance than FD and insurance plan
Nice to hear your feedback. There are very few people who persistently invest for 25 years in MF to see fruits. Your words are encouraging to others.
Those who understand what is being said will be aware and design their portfolio accordingly to manage the risk in an effective manner which will lead to optimised return and have a comfortable journey to reach their goals.
'samajhdaar ko Ishaar kafi hain'
Thanks, Chandan
So please tell where we should Invest. And how to invest
Thank you Lattu sir.
Very nicely explained! All the dislikes are from distributers i guess !
Can you please explain the dividend part by MFs and Stocks ?? And how is that invested back when we take the "growth" plan .
Thanks..!!!
Yes will do
There might not be compounding effect per se but benefits are reaped in terms of increase in NAV value.
When nav is low - invest as much as possible and when nav is high - invest as low as possible. This is the mantra for mutual funds to gain highest gains. May be 11- 12%...
Thank you so much for bringing light into the illilusive understanding of Anualized vs Anual return. You made this video crystal.
Pattu sir superb video.✌️👍. I thought you would also briefly introduce folks about XIRR. Probably as a seperate video i suppose.
Thank you,. I have already done this. See my video today for a link
Mann.. Where have you been all these years. Luvvd your videos. Samma ❤️
Pattu sir. Please make a video/article on how an investor should reach an Equity:Debt asset allocation of 60:40 if most of his/her investments is in debt already (almost 90% in debt). Especially for investors between 35 to 40 age group. I understand that from your rebalancing articles you mentioned that in such scenarios, the only option is to aggressively invest in equity without any rebalance. But wanted to have your detailed opinion on this. Are there any other alternatives which you can suggest. I think this will surely help many investors. Please make a video/article on this. Thank you sir
Thanks for sharing.... valuable insights
Great video Pattu sir. Eye-opening video. Sadly many financial influencers are still using compounding word for Mutual funds which misguides a novice investor.
Everyone knows that there is no fixed guaranteed return...and most investors don't check their pf constantly so the annualized return is a helpful measure
Wow what a clarity., crazy marketing guys . Thanks Sir 👍
I feel annualised return should be renamed to average annualised returns. Hope AMFI or SEBI mandates this proper TOA.
Very well cleared the myth. Well explained.
thank you
Lol Mr Rajesh you should not be blindly following this Pattu.. pls get the facts checked
Great said
What is the formula to calculate SIP return ? means amount invested every time period and same amount
I will make a video about this
Await a video on this!
How about debt mutual funds e.g. liquid funds which more or less has the same annual return?
Thank you very much for making the very useful video sir.. i was so blunder with so much compounding.
So is there any investment scheme which has fixed 15% interest. If No all financial instrument which remain same has Fixed deposit
I agree that MF won’t be a compounding effect. But here we owned a asset or piece of a company which is valued x now and may grow to x+y after say 10 years. After 10 years we can calculate the return generated by this asset and arrive at some % compounded annually that is our CAGR. If it is sip we need to calculate the XIRR to compare interests over a period of time.
Sir I have a question to you, FD has 8 to 9 % return and it is true that it can compounded what you have said. But if investors wants 15 % ret then what is the correct place to invest? U know why I am referring this 15%, because most of Indian company can grow by what they’re are taking fund from banks and bank borrow this fund from us in term of FD so it is my estimation in every point of lending money it has value addition of money so I think in stock market you will see this value added return . Please reply if you have more insight on it. Thank you 💐
15% will require active management in stocks. Simply buying funds will not help
Isnt XIRR a better way to calculate for SIP Mutual funds return? Also, keen in hearing youe views on booking profits and the timing of it. Reason why i ask is because there's no compounding effect in MFS, perhaps makes sense to book profit? Thanks
Pl see articles on goal based portfli managhment on the site
In PPF also the interest rates keep fluctuating evey quarter.
So will you not call it compounding?
But at least it is certain for an year or atleast for a quarter and interest is deposited in our account, wherein there is no interest deposited in case of mutual funds
@@titan3537 clear your concept brother
@@sumitgupta516 Compound interest is very simple... On every year end, I will get some amount as interest, on next year, I'll get interest for my principal and for previous year's interest. In PPF, let's says I have invested 100 last year and I'll get 110 (assume 10% interest)... So next year it will be 121 (assume same 10%). But in case of mutual funds, the profits are getting interest for us... So it is not providing compound interest.
Exactly, so you need to take negative return in mind if you want to be there for long term.
Thank you sir..
Very good video
Sir v well explained. V good video. I salute you everyday you come with good & true things. Thanks.
We believe everything that is told by some so called experts and never use our brain but sir you are different and bring the right perspective.
Once again really appreciate your efforts for educating us.
Please continue the same
High respect and regards.
Thank you
Thanks Sir.
First lets all agree. Mutual Fund returns can be calculated by seeing the Past data and we cannot project or expect the returns that has given in the past. As in FD you get the fixed returns and guaranteed.
Does FD returns takes care of inflation? Its big NO.
Does FD gives better returns over period of time? its big NO.
Does FD gives tax benefit ? its big NO. (Should have taken example as PPF)
Does FD participates in india growth story? its big NO.
So,
Mutual funds have market risk, that does not necessarily mean you will end up zero capital.
Last one year most of the Mutual fund returns have given negative returns or small positive.
It is advisable to do SIPs which will buy more NAV units when market is down and buy less NAV units when market is going up.
So Mutual funds are safe investment as long as you are not worried about negative to postitve or positive to negative fluctuations.
My financial advice:
Open FD as Emergency instrument.
Open MF for Wealth creation.
and for compounding benefits?
But the point is that for a longer horizon invest in mutual funds..instead of annualised or annual..simply calculate total return
Which Bank is offering 10% flat rate? Most offer 5% to 7%
That was an example
Missing the forest for the trees
by his example, it is implied that the 10% rate is RECURRING and not FLAT.
If company provides dividend and you know direct and regular growth and which is depends on the NAV of the respective fund....Market investments subjected to market risks... Depends on market trends.... Example... Land line to mobile...
?
I Agree your point...!!!
I think this is the fastest time I have subscribed to ANY channel. :)
So Pattu Sir where can one enjoy the power of compounding for their investments?
Why should you?! Your money should grow that is all. There is no need for componding
Thank you sir.
How about in case of SIP ?
What you have shown is for lumpsum.
Becz people always recommend SIP when it comes to mutual fund.
Sip solves the problem of investing at wrong time. Suppose you invest when the stock price is high then you will be in loss instead invest as a sip , where the average will be less than lumpsome. If lumpsome is invested when market is low you will more profit than sip. But we can't time market so sip is a safer choice
SIP is a marketing gimmick.
Please make a video on smallcase as well. It seems to have a lot of good features and is misleading to the investors as well
Mutual fund returns cannot be predicted...that is the point that most people miss...there is no possible way in which you can make a definitive statement about how much your invested amount would grow..u have to have a certain degree of trust in the process followed by the fund
Hello everything you are explaining i know that but thanks
Well explained
Thank you
Very deep .
I got this atually by watching for 5 times.
Sir,
I know that "Compounding power" is not there in MFs.
So what...?
You get only 7% in FD & we get @ 18%.
I am an equity investor and like the volatility and take advantage of it to increase my stake.
Those of my friends are still skeptical and getting @ 7%.
Thanking you.
As long as we agree that there is no compounding there is no disagreement! I also have got that "18%"
@@pattufreefincal
Thank you.
Thats why we have the high and low risk buckets. So that a minimal subsistence interest is always generated despite the fluctuations
So where we can find compounding interest
Could u tell please
I was actually wondering why Warren Buffett has been quoting Power of Compounding throughout his Vlogs and why advisors have been pushing to invest for a long term. Going by Maths, I am further confused. Let me ask a simple question?
Eg. SBI SmallCap is quoting 23% CAGR over last 20 years, does that mean that if ₹100 was invested, today's price of the fund is equivalent of ₹100 getting annualised rate of 23% for 20years??? Does that mean the value of investment is say ₹100000, for this ₹100 invested 20 years ago??? I haven't seen markets growing above 70%-80% and say 2nd year it's growing at -70%, then after 2 years ₹100 becomes ₹100 value for the fund. To get 23% CAGR, are you saying that markets have grown at 23% of previous years value for 20years or 23% of the original investment, because if it case 2, then marketers should be screaming 50% growth in 2 years rather than 23%cagr??? What I don't clearly understand is ₹ 1 lac will become ₹1.7 lacs in 2 years @23% and is it for real that Mutual Funds can generate such CAGR, where ₹100 becomes ₹5,000 in 20 years???
have you heard something called CAGR ?
Ok i got your point, psychology is a very important point to consider.
Didn't understand
Good One!
how about nifty index fund?
this is the video which i was looking for
Thanks!
Okay.. understood what you said. But having understood this, we also need to think about investment. So do we put all our saving in FD and PPF? And since the inflation is almost equivalent to the rate of interest these FD's and PPF's provide, its not worth putting our money there either.
Did I anywhere say not to invest in equity?
@@pattufreefincal No, you did not. But I started thinking a bit negatively about MFs after watching this. I am new to this field, learning :)
@@Andy-kk4xc dont worry and invest. Just learn to manage risk well
Very nice sir
It's a very very true and he is very clear
The only compounding effect one would see with equities is reinvesting Dividends paid and Dividends Raised YOY!
Not all stocks grow despite dividends. Dividend investment may have worked for certain companies like Coca cola because the share prices were always reasonable and the stocks split many times in the past.
With MRF or TCS you cant do it. These growth stocks dont pay high dividends. They are more for growth with low dividend. MRF is quite bad in that way. TCS is okay specially if you are buying TCS stocks every year you can do dividend investing after few years.
ITC and BPCL are good examples of dividend investing. The stock prices are reasonable and the dividends are good. But if the stock prices dont move up in the longer run the dividends will still be bad. You will have more stocks of them and the dividends will be less due to the stock prices not going up.
You will get great dividends only when the stock prices go up and the stock splits making it easy to reinvest.
So if this is the case. where to invest money than mutual funds?
Banknifty options
Thanks for saying the truth. I was wondering about power compounding...I don't see much benefits in Mutual funds ...I am investing from last year..money hasn't grown at all....My FD would have earned better return.
As said in 15 years the stock will grow by a lot. And as cumulative the returns will be higher than FD. Remember due to inflation is currently more than 6% , FD will be not much beneficial in longterm
@@argo3907 that's all an expectation. Stock prices dont go up due to Inflation as businesses suffer.
Bank FD are great and safe ways for common citizens. Investing a little in stock markets is okay.
Most finnance influencers fooling innocent people saying that stock markets will give great returns will guarantee you nothing. They will only say inflation is 7 percent and bank interest is 5 percent and fool you.
Mutual Funds invest in equity and debt. The debt has compounding effect. So there is no point questioning that. Now with respect to investment in equities, any growth in equity is fundamentally a function of a company's cash flow, cost of capital and growth rate. What is this growth rate? It is a function of ROE and Retention Ratio. The companies grow by re-investing their earnings also called retained earnings. That is current profits are used to grow the profits. I feel this is compounding. Without compounding nothing can grow. Valuation of Every market product (even futures and options) are based on compounding models (discrete or continuous). There may be other consideration that traders take in like momentum and volume but if you are an investor then compounding happens. My humble submission please.
True
He is just saying compounding will not work for market linked products, did he ever mentioned that Debt funds also doesn't have compounding effect?
@@kmbala555yes he did
आंखे खोल दी आपने । you opened my eyes
instead of annualized return , can one accept , mean return of ,say, past 10 years with standard deviation "x" along with the caveat , past returns are not indicative of future !!
Hello sir if when the money grows we buy more units this is misleading
Just Brilliant
This is the life changing video for investors
Hi sir idha tamil la solli tara mudiuma english la enakku sariya purila idha tamil la video pota engala mari nabargalukku purium
Which bank is giving constant interest rate for FD?
Good one. A very valid point!
@@PABJEEGamer he is mentioning interest rate of FD...