SIP query: Is it right to assume 12% return from equity mutual funds in retirement planning?

When planning for retirement or any long-term goals through the systematic investment plans (SIPs) of equity-oriented mutual funds, it is very common to assume a 12% annualised return. This assumption is driven by the fact that equity mutual funds in India have historically given 12% or more annualised returns in the long term.

For instance, direct plans of eight out of 24 large cap funds have given over 12% annualised returns in 10 years, according to data on the Association of Mutual Funds in India (AMFI) website as of March 10, 2025. Despite the market correction in last five months, as many as eight other large cap funds have given returns between 11-12% in 10 years.

When it comes to mid cap and small cap funds, which have seen more corrections in recent months, there is a 100% strike rate in terms of over 12% returns. Among flexi cap funds, as many as 12 out of 18 schemes have given over 12% returns in 10 years.

Data source: AMFI website as of March 10, 2025.

However, the current market correction seems to have raised doubts among some investors about whether they should assume 12% returns from equity SIP for long-term goals? One such person recently asked us:

Anand K Rathi, co-founder of MIRA Money, an investment platform, answered the query via email, saying, “Absolutely. There isn't a perfect match for this (assuming 12% return).”

Rathi further said he has a method for understanding it: “If we look at the nominal GDP, which is projected to be 10.1% in 2025-26. If a country can grow at 10.1%, well-managed companies, especially large-cap ones, should ideally generate an additional 2-3% growth. So, if the country grows at 10.1%, the corporate sector within that country might grow around 12-13%.”

However, considering the market dynamics, there will be overvalued and undervalued companies.

“Therefore, we can expect to reduce that 13% corporate earnings growth by about 1%. Consequently, we can anticipate a net growth of around 12%. This is what the index will likely reflect,” Rathi said.

“Ultimately, earnings influence indices, which are tied to the country's economic growth, particularly for large-cap firms. That's why I believe a 12% index growth is a reasonable assumption for retirement planning,” he added.

However, one cannot guarantee future returns or make specific predictions about them, Rathi said, adding it is important to understand that annualised returns largely depend on your risk profile.

Based on historical data, if you are a conservative investor, you can typically expect a return of around 7-8%. Similarly, if you have a moderate risk tolerance, you might anticipate about 9-10% returns. And for high-risk investors, potential returns could be around 11-12%