Analyzing Nifty 50 — the Stock Pulse of India!
The Nifty 50 is a benchmark Indian stock market index representing the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange (NSE). It covers 13 sectors of the Indian economy and offers investors exposure to the Indian market in one portfolio.
Data plays a pivotal role in decision-making. But as they say, this is ‘easier’ said than done.
The problem with data is that we humans are either too smart or foolish enough to interpret it the way we ‘wish’ to. While working with data, we often struggle to control emotions, thanks to our inherent, long-lived ‘biases’.
Biases like:
Confirmation bias — we deliberately ‘look for’ favorable or unfavorable data that suits the ‘confirmation’ we already have in mind.
Recency bias — all-time high markets, for example, are perceived as wealth compounders, while the falling markets are considered depressing and wealth eroders. We often swing between these emotions, changing our narratives ‘impulsively’ as the grips switch from bears to bulls and vice versa.
Loss aversion bias — we prefer ‘avoiding losses’ rather than acquiring equivalent gains. For most of us, the pain of losing is felt more intensely than the pleasure of an equivalent gain.
Anchoring bias — we tend to rely heavily on the ‘first’ piece of information we encounter while making decisions. For example, stocks with lower price-to-earnings ratios are generally considered undervalued which may not always be true.
One good way to deal with our biases is to start with ‘unambiguous’ questions we need answers to and let the data drive us not only with the ‘answers’ but also with the ‘next steps’… while being aware of these mental blocks disguised as egregious biases.
This brings us to our million-dollar question!
IS NIFTY 50 A GOOD OR A BAD INVESTMENT?
Even though historical performances do not guarantee future returns, they are an effective tool to understand how markets have performed and survived globally through the nasty ups and downs of wars, pandemics, economic recessions, etc.
To answer his question, we analyzed the data from 1999 through 2024, to understand our odds of making or losing money if we had invested in the Nifty 50 index at different times in the last 25 years.
Here’s what the data suggested.
Worst-case scenario!
Let’s say we got a bit unlucky and ‘every year’ ended up investing when the markets were at an all-time high. Like any amateur first-time investor, entered the market at its peak, primarily due to FOMO. We wished we got in earlier, and made unprecedented gains. Gains we could boast about with friends over drinks.
Well, this is certainly not the best practice and we all know that.
The reality, however, is that most of us invest in the market, exactly at this point.
So the question boils down to… Is it ‘really’ bad, how ‘bad’?
Let’s find out.
Let’s say different people invested a lump sum amount when the markets were all-time high, each year between 1999–2023.
The graph below shows the CAGR returns for each year from their year’s high.
Considering the CAGR returns of FD, PPF, and EPF range between 5% to 8%.
The data suggested that in the last 25 years, Nifty 50 gave a similar or better CAGR 96% of the time and has failed our traditional investments only 1 out of 25 times.
It outperformed our traditional investments about 68% of the time with a CAGR > 10% even when we chose to invest every time the market was at an all-time high for that year.
And, even in the worst-case scenario, it failed only in the last year (2023). Like they say we need to give equities a runway of at least 5 years to judge their performance. So this too is likely to turn around soon. (Confirmation bias?)
Wait a minute!
They didn’t necessarily have to invest ‘all’ their money when the markets were at all-time highs. What if they stepped back a little, resisted their temptation, and split their lump sum investment into say 365 equal parts and invested them on daily basis, as an SIP or a systematic investment plan?
This concept of splitting investments over a time frame is called cost averaging. Cost averaging can be done on a daily, weekly, monthly, quarterly, or any other time frame. Studies suggest that there’s not too much of a difference in terms of long-term results and a monthly average is preferred primarily due to convenience. Here, however, we have taken 365 day average for the year to simplify calculations.
Cost averaging huh! Would that be any different?
Let’s find out.
The graph below shows a quick comparison as to how CAGR would have changed if people had spread out their investment into daily installments (or cost-averaging) as opposed to investing the total (or lump sum) amount when the market was all-time high, each year between 1999–2023.
So, in the last 25 years, Nifty 50 never underperformed against our traditional investments… rather outperformed our traditional investments 96% of the time which seems like a spectacular track record.
But then, is this not a perfect example of a ‘recency’ bias since Nifty 50 is at an ‘all-time’ high?
Fair point!
To counter the recency bias, let’s plot a graph to see the change in CAGR number over the years if the market gets corrected by 30%.
We can spot a few interesting observations:
- The impact of sudden sharp corrections can be seen minimized by taking the cost-averaging route as opposed to the lump sum.
- Even with a huge correction of 30%, Nifty 50 continued to equal or outperform traditional investments 88% times in the case of cost-averaging and 76% times in the case of the lump sum at an all-time high scenario.
- The long-term investments weren’t impacted much probably validating the popular belief that ‘time in the market’ is more important than ‘timing the market’.
But then, there are 12 to 24 percent chances of underperformance which means ‘loss of money’.
So, would we let our loss aversion bias take over?
Time to dig deeper!
The reality is that Nifty 50 corrects itself up to 15% once every year from the previous year’s high. 7 out of 24 years, it corrected between 15 to 30%, and 5 times in 24 years it has corrected itself over 30% from the previous year’s high.
During this duration, the Nifty 50 has seen three significant crashes in 2000 (dot com bubble), 2008 (global financial crisis), and 2020 (COVID pandemic) respectively. Out of which the worst was the crash of 2008 where Nifty 50 saw a sharp correction of near 60% leaving a lot of weak hearts shaken to the core, promising they would never invest in stock markets.
But then, Nifty not only continues to stand tall but also seems to ‘reward’ those who trusted it in tough times. For example, money invested at the peak of the COVID pandemic has generated a CAGR of 30% thereby tripling investments in just 4 years.
Sweet! Isn’t it?
Last but not the least, let’s compare the rolling returns for Nifty 50 as well as to give us a better idea of gains if we plan to stay invested for long durations.
Here’s a comparison of 3 year, 5 year and 10 year rolling returns of Nifty 50.
Key observations:
- The 3 year rolling return for Nifty 50 equaled or outperformed FD, PPF etc. 94% times. Rolling returns ranging between 5.15% to 19.23%. It underperformed only once in the year 2013 where it gave returns of 2.67%.
- The 5 year rolling return for Nifty 50 too equaled or outperformed FD, PPF etc. 94% times. Rolling returns ranging between 6.12% to 19.23%. It underperformed only once in the year 2012 where it gave returns of 3.2%.
- The 10 year rolling return for Nifty 50 equaled or outperformed FD, PPF etc. 100% times. 25% times, the rolling returns ranged between 7.4% to 9.5% while 75% time the rolling returns ranged between 10% to 17.6%.
- Nifty 50 never gave a negative return in the longer durations when bought via cost averaging.
To summarize, Nifty 50 seems to be ticking all the right checkboxes. It gives better returns than FD, PPF, etc. Even though it is more volatile and is prone to sharp corrections, it has a proven track record of making stronger comebacks, always rewarding its long-term ‘loyal’ investors.
So what are we waiting for? Let’s find the best Nifty 50 index funds or ETFs before it’s too late to invest.
OR… Wait a minute!
Did we just fall for an anchoring bias?
Is Nifty 50 the best or are there other potential candidates who could give better risk-adjusted returns than Nifty 50?
Let’s find out in the upcoming chapters.
Disclaimer: The information provided herein is for general informational purposes only and does not constitute personalized investment advice or a recommendation to make any specific investments. All investments involve risk, including the potential loss of principal. The value of investments can go up as well as down, and past performance does not guarantee or predict future investment results. Investors should conduct their due diligence and consult with a registered financial advisor before making any investment decisions. The author does not assume any liability for investment decisions based on the information provided.
