Returns & Insights from Nifty 50
Let’s look at Standard Vanilla Nifty 50 graph.
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:
- What returns can I expect from Nifty 50 over 3 year/5 year/7 year term?
- 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.
3 year Rolling SIP returns
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,
- X-axis is the end date of SIP. For 3 years prior to the end date, a fixed amount was invested EVERY MONTH.
- 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.
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!
5 year Rolling SIP returns
Similar graph as before, this is for 5 year SIP. XIRR calculated at the end of 5th year for each data point.
Looks much less crazy than 3 year data! Much more stable.
7 year Rolling SIP returns
Similar graph as before, this is for 7 year SIP. XIRR calculated at the end of 7th year for each data point.
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>
Important Insights
Now, let me pick the 5 year graph & highlight some important features!
2 Insights stand out:
- 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!!
- 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!
What returns can I expect in the future?
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.
Conclusion
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.
Post Script:
*- Just because returns from India is dwindling down does NOT imply one simply jumps to investing in other market stocks. Despite dwindling returns, the important aspect is that returns are still above official inflation in India.
Some approximations used:
- I haven’t used data post 2017. This is not intentional from me. My source is official NSE website. For some reason, they have sparse data post 2017! Hence I was forced to exclude data post 2017.
- SIP date for all calculations was 1st market day of every month. This is acceptable because variance is low across the dates. Further, it cannot be predicted (in foresight) which date will give superior/inferior results.
- Graphs are basis Nifty 50 NOT Nifty 50 TRI Index. Thus, expect a 1% better results overall across time periods. <Before inflation &taxation adjustments>
Importantly, above approximations do NOT impact the insights.
