When planning for retirement using SIPs, is it appropriate to rely on 12% return from equity MF investments?

When evaluating retirement or other long-term goals through systematic investment plans (SIPs) in equity-oriented mutual funds. It is a common practice to project a 12% annualised return when considering these investments. This projection is derived from the past performance of equity mutual funds in India, which have consistently generated annualised returns of 12% or more over an extended period. However, it is essential to carefully assess whether relying on a 12% return from equity investments is suitable for retirement planning. Please guide in this regard.

Advice by Animesh Hardia, Senior Vice President, Quantitative Research at 1 Finance

I've spent years advising clients on retirement planning, and one conversation comes up repeatedly: "I've heard equity funds give 12% returns, so I should be set for retirement if I invest regularly, right?" If only it were that simple!

The truth is, while many of us use this 12% figure as a planning benchmark—and yes, historically Indian equity markets have delivered such returns over extended periods—I've seen first-hand how dangerous it can be to build your entire retirement strategy around this single assumption.

Consider what happens during market corrections: People who had planned retirements based on consistent 12% returns would've faced a 50-60% market crash during the Great Financial Crisis of 2007-08. Those near retirement would have had to drastically adjust their lifestyle expectations or continue working. Meanwhile, younger investors who stayed invested and continued their SIPs through the downturn actually benefited tremendously when markets recovered.

This pattern repeats itself, as we've seen with the recent correction in the Indian stock market. Since October 2024, the Nifty has dropped nearly 14-15% from its all-time high, reminding investors that markets don't move in straight lines. Many who had grown accustomed to the post-pandemic bull run are now experiencing volatility first hand, especially in the small and mid-cap segments where corrections have been even steeper.

This teaches an important lesson: market returns aren't linear. The 12% average might include years of 30% gains followed by years of negative returns. Your current experience depends entirely on when you enter and exit the market.

When you use those retirement calculators that project neat, straight-line 12% returns, they're hiding a messier reality. In my opinion, you should run multiple scenarios:

A conservative case (8-10% returns)

A moderate case (10-12% returns)

An optimistic case (12-14% returns)

This approach gives a more realistic picture of potential outcomes. Many clients who initially believe they need to save just Rs 15,000 monthly for retirement realise they actually need closer to Rs 25,000 to be truly secure after examining these different scenarios.

Another factor often overlooked is inflation. Many people celebrate achieving their "retirement corpus" only to realise it won't provide the lifestyle they expected because they didn't account for rising costs.

If inflation averages 6% (which is realistic for India), your 12% return effectively becomes a 6% real return. This means your purchasing power is growing much more slowly than your nominal wealth.

Rather than fixating on a specific return percentage, I encourage a more balanced approach:

1. Build a core of stable investments supplemented by growth-oriented assets.

2. Embrace the beauty of asset allocation and weather market storms much better with diversified portfolios across equity, debt, gold, and sometimes even real estate.

3. Gradually shift from growth to income as your timeline shortens

Numbers and percentages matter, but equally important is understanding your own behaviour. Will you panic and sell during market crashes? Can you stick with your investment plan during downturns?

I've noticed that clients who understand their own financial behaviour and have realistic expectations tend to achieve better long-term results than those chasing the highest possible returns.

While a 12% equity return projection isn't unreasonable for long-term planning, building flexibility into your retirement strategy is crucial. Regular reviews, adjustments and a diversified approach will serve you better than rigid adherence to a single return assumption.