Stop looking at Sensex returns!

Q. What makes you say that Investors can expect 15% returns from Equity?

A. Hear the experts say that.

Q. What makes the experts say that Investors can expect 15% returns from Equity?

A. Enlighten the readers please.

Okay, let me share where that number comes from. Historically, Sensex has grown at 15-16% annually. But how relevant is this historical data?

August 2019

I attended a talk from Rajeev Thakkar, Chief Investment Officer (CIO), PPFAS Mutual Fund. Rajeev is well recognised for his insights on Capital Markets. After his talk, the forum was open to audience questions. It didn't take much long for the audience to ask for Rajeev's views on markets. As expected, he shared facts and figures which help him draw his deep insights.

Two important numbers have stayed with me ever since. We are no longer in an economy with Inflation rate in double digits. The government has managed to keep the inflation in range of 5-6%. Also, we are now in times when we cannot expect 15% return from equity. The equity returns will still be twice the inflation rate. That is not 15%, that is 12%. Let us look at some more data to focus on why 12% and not 15%.

Facts about Sensex!

Here are few less known or less observed facts about Sensex:

1.    Launch Year & Base Year

BSE publishes Sensex since 1 January 1986. The base value of the SENSEX set as 100 on 1 April 1979 and its base year as 1978–79. Apparently, Sensex levels for 1979 to 1986 are based on data and not actual trading. My efforts to find the computation of data for this period (1979 - 1986) have not paid off so far.

2.    Indian Economy

We are well aware that India was a closed economy before 1991. The govt. licensed only four or five players in steel, electrical power & communications. Licence owners built up huge powerful empires. Of course, these license owners would feature on the index (Sensex) too. Recently, Mint Money published the below chart showing how Sensex has evolved over the years.

See variance in sector allocation and stocks included on the index (Sensex) over the years? That’s not all.

Before 1991, India adopted fixed exchange rate system. Indian Rupee was not easily convertible then. India faced problems in balance of payments since 1985 due to the fixed exchange rate system. On 12 Nov 1991, balance of payments crisis forced Indian economy to open to the world. 

Since 1991, India develop at a pace like never before. Of course, invention of computers & information technology have played a big role. In nutshell, we can conveniently dissect the Indian economy in two phases. Pre 1991 era and post 1991 era. But India also saw another major development in 1996.

3.    Returns

Let us look at (annual) growth rates keeping in mind the above facts. Below is the table showing the same.

Look at Sensex growth in pre-liberalisation phase (26.16%) and post-liberalisation (11.67%) phase., They look like rates from two different worlds. Well, aren’t they?

Until 1996, all the securities (equity & bonds) were held in physical forms. I am sure you would have heard of 'Share Certificates'. Imagine the economy then, with paper securities - bad deliveries, delay in transfer of shares, forgery, legal disputes, theft, fake certificates etc.

NSE launched Nifty 50 index on 3 Nov 1995. In 1996, NSE introduced the Dematerialised (Demat) Accounts. Gradually, people started trading/investing in securities online.

Compute returns on Nifty 50 index since launch to now. You'd learn that Nifty has grown 10.86%. Sensex growth for the same period is not much different (10.74%).

Conclusion

We are in times now where rules of business have changed. With advent of technology, competition is no more local, it is global. Looking at historical returns from 1979 to 1991 (or 1996 may be) is less relevant. 

If you are willing to set a benchmark for Equity returns, Nifty 50 (since launch) is a better measure. Alternatively, consider Sensex growth for similar period.

To sum it all, it is time that we set our expectations to 12% returns from equity. If that sounds too conservative, consider 12-15% returns. Because if we set the expectations at 15%, or assume 15% on financial plans when the markets deliver 12% returns only...

I'd leave it there for you to analyse.

Thank you for reading the piece. I'd love to hear your opinion about it. Do leave your comment or write to me at [email protected].

Kind regards,

Milind Kohmaria

Seeker, Trainer, Entrepreneur

Milind Kohmaria is a Corporate Trainer & Consultant. He is a Certified Financial Planner & Chartered Wealth Managerwith over a decade of experience in Accounts & Finance. He has delivered 79 Trainings & Workshops to 2,726 Participants over 853 Hours.

Below is a gist of his motives.

1.    Help Seekers Live Fulfilling Life with Work-Life Matrix

2.    Make Financial Planners' files & data communicate professionally by using Everyday Tools

3.    Make Investors’ money work hard for them with Personal Finance Workshops

Milind is an empanelled trainer with Education Institutes like BSE Institute Ltd, CIEL, Omlet Global School, etc. He is also invited by B Schools as a Guest Faculty to conduct sessions on Financial Planning & Wealth Management. Milind is a member of Financial Planners Study Circle Group, Mumbai.