Non-linearity of Mutual fund returns

If someone told you that a mutual fund scheme has delivered 15% CAGR (Compounded Annual Growth Rate) over a 15-year period, have you ever wondered how this return had played out over the years and how the journey of this return had been year on year?

I will explain this basic concept in this blog.

I have taken example of a real mutual fund scheme launched in April 1997. In the below table, column 2 shows absolute return given by this scheme each calendar year (Jan – Dec). And let’s assume 1 lakh was invested at inception (April 1997) in this scheme. Last column shows the market value of the investment at the end of each calendar year.

Year	Returns	Market value at year end
1997	12.90%	1,12,900
1998	18.07%	1,33,300
1999	128.59%	3,04,706
2000	-31.87%	2,07,582
2001	-24.19%	1,57,368
2002	9.11%	1,71,697
2003	129.84%	3,94,623
2004	30.04%	5,13,155
2005	52.93%	7,84,767
2006	47.09%	11,54,328
2007	69.79%	19,59,956
2008	-49.61%	9,87,655
2009	90.65%	18,82,954
2010	19.83%	22,56,287
2011	-23.89%	17,17,246
2012	33.05%	22,84,783
2013	0.07%	22,86,487
2014	53.00%	34,98,398
2015	-0.74%	34,72,391
2016	4.06%	36,13,322
2017	40.03%	50,59,763
2018	-7.45%	46,82,811
2019	15.00%	53,85,232
2020	16.9%	62,95,337
2021	33.4%	83,97,979
2022	-4.36%	80,31,827
2023	32.39%	1,06,33,336
2024	20%	1,27,60,003

Carefully observe the variation and volatility in the returns year on year. Also observe the growth / de-growth of the investment value year on year.

Fixed deposits, RDs, PPF, Sukanya Samriddhi Yojana etc. give fixed and linear returns and the growth is linear. However, as you observed from above table, equity mutual fund scheme's returns are not fixed each year but non-linear and of course the growth is non-linear and lumpy.

Above mutual fund scheme has delivered a CAGR of ~ 19% from 1997 – 2024. Isn’t it good despite the volatility?

Choice is between

1) a Fixed deposit that gives a fixed 7% p.a kind of return

Vs

2) an equity mutual fund scheme that gives a lumpy non-linear 15% CAGR

Note: Returns of 7% and 15% mentioned above is for explanation purpose only.

I certainly prefer a lumpy (non-linear) but superior return from an equity mutual fund scheme over a fixed but lower return from an FD, PPF or other similar products.

You too can think carefully and make your choice.

Have a fun weekend!

Disclaimer:

Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund, or designing a portfolio that suits your needs.