What a 20% annual return really means
An annual growth rate of 20% compounds quickly. If you had invested ₹1,00,000 in a fund that delivered 20% per year for five years, your investment would have grown to roughly ₹2.48 lakh. That’s the power of compounding: returns earn returns, and growth accelerates over time.
How the math works
Compound growth uses the formula (1 + r)^n, where r is the annual return and n is the number of years. At 20% for five years, (1.20)^5 ≈ 2.49, so the original ₹1,00,000 becomes about ₹2.48–₹2.49 lakh.
What to keep in mind before assuming similar returns
- Past performance isn’t a guarantee: Strong historical returns don’t ensure the same results in the future.
- Higher returns often mean higher risk: Funds that delivered 20% may have taken on volatility or concentrated bets.
- Time horizon matters: Equity-linked funds can swing widely in the short term but tend to smooth out over longer periods.
Key factors to evaluate in a mutual fund
- Fund objective and holdings: Does the portfolio match your goals and risk tolerance?
- Expense ratio: Fees reduce your net returns—lower is usually better for similar strategies.
- Fund manager track record: Experience and consistency matter, but avoid relying on hero-manager narratives alone.
- Portfolio diversification: Check sector and stock concentration to understand downside risk.
Practical ways to invest
- Lump-sum vs SIP: A lump-sum can benefit from immediate exposure in rising markets, while a Systematic Investment Plan (SIP) spreads risk over time.
- Review periodically: Rebalance and review fund performance relative to peers and benchmarks every 6–12 months.
- Tax and exit considerations: Be aware of capital gains taxes and any exit loads that affect net returns.
Bottom line
Numbers like “20% annual growth” illustrate how powerful compounding can be—turning ₹1,00,000 into about ₹2.48 lakh in five years. But when choosing the best mutual funds, focus on risk, fees, consistency, and fit with your financial goals rather than chasing headline returns alone.