Why Consistent Low to Mid-Return Mutual Funds Outperform Volatile High-Return Funds Over 10 Years?

Introduction

In an age when information is readily available through print and social media, people are inclined to believe wealth creation can only be done by buying into – multibagger stock or a high-performing Mutual Fund.

This cannot be further from the truth!!

When it comes to long-term investing, stability often beats flash.

While high-return mutual funds can look attractive in the short run, their erratic behaviour can chip away at actual gains due to market timing risks, emotional investing, and inconsistent compounding.

Explaination

To understand the concept, let us take one example each from India and the US

Indian Stock Market:
Suppose an investor wants to invest ₹10,000 monthly for 10 years.

They have two options

• Fund A is a mid-return mutual fund offering almost a consistent 11% annual return
• Fund B is a high-return equity mutual fund, averaging 14% annually but with high volatility—returns swing between -10% and +30% yearly

Taking this into consideration, what will be the output at the end of 10 years for both the funds

Fund A –> Compounds steadily, growing to around ₹22.3 lakhs in 10 years.

Fund B –> Despite a higher average return, the fund underperforms due to high volatility, leading to a final corpus of closer to ₹20–21 lakhs. This final amount is dependent on withdrawal behaviour and market entry points.

The US Stock Market:
Suppose an investor wants to invest $500/month for 10 years.

They have two options

• Balanced S&P 500 index fund returning a steady 9% annually.
• Volatile tech-focused fund averaging 12% over a decade but with sharp drawdowns (e.g., -25% in certain years)

Taking this into consideration, what will be the output at the end of 10 years for both the funds

Fund A(S&P 500) –> Compounds steadily, growing to around $94,000 in 10 years.

Fund B(Tech-Fund) –> Despite a higher average return, the fund underperforms due to high volatility, leading to a final corpus of around $85,000–$90,000. This final amount is dependent on withdrawal behaviour and market entry points. Also, this fund is susceptible to panic-selling during drawdowns.

Conclusion:

While high-return mutual funds look appealing on paper, volatility introduces risk—not just of market losses, but of poor investor decisions. Stable, low to mid-return funds allow for disciplined investing and compounding—turning patience into profit over the long term.

For long-term goals, stable, low-to-mid return mutual funds often provide more dependable wealth creation.