Which has better returns per year, mutual funds, stocks, or bonds?

Which has better returns per year, mutual funds, stocks, or bonds?

Stocks and bonds are asset classes by themselves while mutual funds are instruments to invest in these asset classes. So, a mutual fund’s performance in most cases depends on the performance of its underlying assets. Which means, in the universe of mutual funds, there are categories of funds which duplicate the characteristics of both stocks and bonds. Hence it will be unfair to compare the returns of mutual funds to either of these investments.

Stocks vs Bond

Who gives higher returns? 
Now, purely on the basis of historical data, stocks have performed better than bonds in the long term. If you look at the chart below, Sensex (benchmark index of BSE) has surged from 15,000 in 2009 to over 38,500 in 2019 (after topping 40,000 earlier this year). In contrast, yields for the benchmark 10-yr government bond have risen from 5.5% in 2009 to 6.5% right now.
Stocks and bonds are asset classes by themselves while mutual funds are instruments to invest in these asset classes. So, a mutual fund’s performance in most cases depends on the performance of its underlying assets
With stocks, one can expect returns in the range of 12-15% on a conservative basis, while bonds tend to give returns in the range of 7-10%. Additionally, stocks can offer better returns if the company growth is exponential, earning the investor potentially lakhs on an originally minuscule investment. But the thing with stocks is, you need to be well-versed with the stock markets to get the returns.
Stocks and bonds are asset classes by themselves while mutual funds are instruments to invest in these asset classes. So, a mutual fund’s performance in most cases depends on the performance of its underlying assets

Risk-Reward trade-off?

 Generally, bonds offer lower rates of returns than equities. The simple reason behind this is the risk-reward trade-off. The lower the risk, the lower the returns. The higher the risk, the higher the returns. Bonds are lower risk than equities to the extent there is a legal obligation for the company to pay bondholders their regular “coupon” ahead of any payment of dividends to shareholders. In the event of corporate failure, the company will pay bondholders first before leaving whatever is left, on winding up of a company, to shareholders.
For investors willing to take the risk, stocks can pay more than bonds in returns as the company's stock could continue rising. However, one must understand that the stock universe consists of heterogenous and disparate shares and companies. When it is said that stocks perform better than bonds, it is not to say that all these shares /companies perform better than bonds.

Long term vs short term?

 If you purely look at returns on an annual basis, there will be many instances where bonds have outperformed stocks. Equities are investments that can only be truly appreciated when you look at it from a long-term perspective.
On this premise, coming back to mutual funds, equity-focused mutual funds tend to give better returns than debt focused ones. But similar rules apply. One needs to invest in equity mutual funds for the long term rather than gauging their returns on a short-term basis. Debt focused funds, in contrast, work better in the short-to-medium term.
Previous
Next Post »