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Returns & Insights from Nifty 50. Let’s look at Standard Vanilla Nifty 50… | by Rohit Jejani | Dec, 2021


Rohit Jejani

Let’s look at Standard Vanilla Nifty 50 graph.

Nifty 50 over the years

This is one of the most insight-less graphs. There is NO meaningful insight in above graph. (only insight is: Nifty 50 grows with blips of falls) It cannot answer basic questions like:

  1. What returns can I expect from Nifty 50 over 3 year/5 year/7 year term?
  2. Obviously, Nifty 50 recovered from 2008 crisis. But how good has been the bull run post 2008 (vis-a-vis pre 2008)?

Let’s look at more insightful graphs.

Most likely you have an SIP (Systematic Investment Plan), where you invest a fixed amount every month into a particular fund. Assuming 3 year SIP, What returns can you see in 3rd year?

Let’s look at relevant graph for that question. To read the graph,

  1. X-axis is the end date of SIP. For 3 years prior to the end date, a fixed amount was invested EVERY MONTH.
  2. Y-axis is XIRR (standard evaluation metric) represents rate of growth at the end of SIP tenure.

Let’s take one data point. <Highlighted in red> For this, one had invested a fixed amount EVERY MONTH from the year 2001 to 2004 (36 months). On 1st Jan of 2004, the 40% XIRR is observed.

3 year SIP returns over time

Important Note: The important aspect is that XIRR is calculated at the end of 3rd year SIP, for EACH data points. Thus, this represents a real world scenario.

Also, note that negative returns are muted here! Microsoft Excel fails to compute negative XIRRs, imputes it with 0%! So, do keep these negative returns in mind!

What returns can I expect for a 3 year SIP? It ranges from -ve to 60%! This implies: 3 year SIP, returns vary drastically! Nothing can be predicted on returns of 3 year SIP!

Similar graph as before, this is for 5 year SIP. XIRR calculated at the end of 5th year for each data point.

5 year SIP returns over time

Looks much less crazy than 3 year data! Much more stable.

Similar graph as before, this is for 7 year SIP. XIRR calculated at the end of 7th year for each data point.

7 year SIP returns over time

Much more stable graph. No negative returns. Lots of good returns. BUT, there are time periods with returns below inflation (~7%). Despite 7 years of diligent SIP, there are cases where returns are be below inflation. <Read grim realities of Inflation here>

Now, let me pick the 5 year graph & highlight some important features!

5 year SIP returns over time

2 Insights stand out:

  1. 2008 crisis impact: From vanilla Nifty 50 graph, one would infer that we recovered from 2008. (And we did!) However, if you look at returns graph. It would be clear that returns from Indian equity market was in 20–40% range pre-2008. After 2008, returns are NOT even close! No-one knows the reason for it. Shockingly, it is NOT even discussed!!
  2. Returns from Indian equity market has been dwindling down in recent times! Seems to have stabilized in the recent times.

While I have used 5year returns to demonstrate these insights, it is valid across time frames (3 year/7 year/10 year etc)

Such important insights CANNOT be inferred from vanilla Nifty 50 graph. Yet it continues to be a popular graph to look at! Nuts!

3 year/5 year SIP returns are quite crazy! Returns will have drastic VARIANCE!

7 year SIP returns are much more stable. Recent returns range from 5%-15%.

One aspect has to be completely clear, when deriving insights from these graphs. Total Portfolio returns are going to be in low single digits! (This was derived in detail here.) The only goal of money management is to shield money from inflation & taxation. Investing is NOT a way to get rich.

NIFTY 50 vanilla graph is NOT helpful to gauge returns!

Personally, I don’t even bother following vanilla NIFTY 50 graph!

Returns from Indian Equity market has been dwindling down*!

3 year & 5 year SIP returns have high VARIANCE!

7 year SIP returns are much more stable.

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