New Delhi, Feb. 25 -- Most investors enter equity mutual funds expecting an annual average return of about 12%. And why not? The Nifty 50 has delivered a compounded annual growth rate (CAGR) of 13.6% over the past 35 years. Extrapolating historical returns appears to be a logical way to set expectations.

But should investors realistically expect 12% annual returns from equity mutual funds, especially when studies show a gap of as much as five percentage points between fund returns and investor returns?

First, investors must understand that the oft-quoted 12% is a long-term average achieved over many years, not a year-on-year outcome. Misinterpreting it as an annual return often leads to unnecessary portfolio churn. Averages also mask vo...