Vijay Kumar Gaba

The benchmark Nifty 50 crossed the 16000 mark for the first time this week. Predictably, the moment was celebrated by media and “market influencers” with gaiety and fervor that is usually shown at Nifty50 crossing every subsequent thousand (K) mark. The fact that from 10k to 11k - it is a 10% rise; whereas from 15K to 16K it is just 6.67% rise, is usually disregarded in celebrations and recounting of the journey from one ‘K’ mark to the next “K’ mark.

It is also mostly ignored that Nifty, like any other statistical number, is meaningless in isolation. It must be juxtaposed with some “other” statistical number to derive any inference. The selection of this “other” number, however, usually depends upon what the data user wants to conclude. If the user wants to feel good about the current Nifty number, a comparison with an inferior set of statistics is preferred (e.g., Nifty has performed better than gold over past decade); whereas if the user wants to show the current Nifty number in a poor light, a superior set of statistics may be chosen to compare (e.g., Dhaka DSE30 has outperformed Nifty50 by 150% over past one month).

However, if the idea is just to celebrate, like drunk dancing in the wedding of a distant relative, a statistical number may be used in isolation.

Nifty: Drunk dancing in a wedding

In past 25years, Nifty return pattern has been quite erratic. From one ‘K’ to the next ‘K’ view point, there have been three instances of very fast journeys (2006-08; 2017-18 and 2020-2021); and there have been two long journeys (1993-2003; 2008-2015).

But this data may actually mean little for an individual investor, considering that-

·         The average vintage of investors in Indian market may be less than 15years;

·         There have been four massive draw down of over 25% each in these 25yrs, where many investors may have given up with little or even negative returns;

·         The point to point return in Nifty from any randomly selected date means little for individual investors. It is the actual return that matters;

·         Anecdotal evidence suggests that maximum investors take or increase their equity exposure in the rising market only. The largest inflows by household investors are usually seen during the last phase of an up move. Also, the exposure of household investors to Nifty ETFs is not significant, so change in Nifty value may not actually reflect the return earned by an average household investor; and

·         Most household investors prefer to invest in mid and small cap stocks with ‘multibagger’ return potential. The rate of failure in this segment is extremely high. There is decent chance that most household investors have underperformed the Nifty returns over this period.

For a majority of the household investors, therefore, celebrating a milestone in the 27yrs journey of Nifty is mostly like drunk dancing in the wedding of a distant relative. It gives a momentary high, dirty cloths and a painful hangover, the next morning.

Good, Bad and Ugly

The Good: Increased household participation in equity investing is a good sign for everyone – corporates; investors; market participants and the government. The channeling of household saving to productive sector, against negative real return yielding deposits or unproductive assets like gold is always welcome.

Another good thing to note about Indian equities is that Nifty has outperformed the global peers in INR as well as USD terms during past 12 months.

The Bad: However if we accept that (a) most of the household investors were already fully invested in March 2020; (b) the new investors have not made meaningful allocation to equity and are just testing waters; and (c) A large number of investors have withdrawn money from mutual funds and other professionally managed investment scheme and invested directly in equity (as indicated by the data of larger retail participation in daily trading activity and persistent outflow from mutual funds over past 15 months) .then we could easily assume that not many investors have made 100% return from the lows of March 2020, even though most of those who stayed invested through panic would have been saved from losses and made decent return on their investments. Also it would be reasonable to assume that the current portfolios of many investors are dominated by stocks with relatively poor quality of balance sheet, earnings profile and sustainability.

The Ugly: The ugly part is that the small and midcap stocks have massively outperformed the benchmark since Pandemic lows of March 2020. Not all small and midcap stocks are poor quality. But a large part of these stocks are either poor quality or represent highly cyclical businesses. This kind of divergent performance has usually ended disastrously for investors. As of now, there is no reason to believe it will be different this time.

Nifty returns vs Investment returns

We can put the Nifty returns in perspective by taking example of these two household investors ‘A’ and “B”.

Investor A is an ideal investor. He is 40yrs old; started investing in 2006 (Nifty 3966) when he joined his first job; has a portfolio that is mostly aligned to Nifty (mostly large cap funds and some direct equity); invests his surplus savings (Rs5,00,000/year) at the end of every year; and has not sold anything in 15years.

After 3 full market cycles, this investor would have earned a return of 11.55% CAGR as of today. The rate of change in Nifty in this period is 10.13% CAGR.

Investor B is also a household investor, 40yrs old, started investing in 2006 (Nifty 3966) when he joined his first job; has a portfolio that is mostly aligned to Nifty (mostly large cap funds and some direct equity); invests his surplus savings (Rs5,00,000/year) at the end of every year; but is not as disciplined and confident as the Investor ‘A’. He easily gets influenced by the forces of greed and fear – sells during panic and buys in euphoria.

He started in December 2006 and exited in December 2008 (post Lehman); redeployed the sale proceeds and new savings in December 2010 (Post QE) and exited in December 2016 (post Demonetization); again redeployed in December 2017, did not get panicked in March 2020, and is still invested. This investor would have earned 7.9% CAGR on his investment, though his net principal amount invested is same as Investor ‘A’. (For the sake of simplicity, dividends and cost of investments have been ignored in these calculations)

Nifty returns: A realistic expectation

The jargons like long term and short term are frequently used by the market participants, without providing any context to it. This jargon may have entirely different connotations for different set of investors. For taxation purposes, it refers to less than 12 months (Short term) and more than 12 months (long term). For risk capital investors (VC, PE etc.) this may relate to life cycle of a business; and for stock traders it may a technical swing lasting between few weeks to few months. Also, for a portfolio (diversified mutual fund etc.) investor this could be different than the investor holding a direct stock.

If for the sake of simplicity, we assume long term to mean 5 calendar years, Nifty returns (rolling 5yr CAGR) were very volatile for first 20years (1995-2015). Since then the volatility has reduced materially, with this number stabilizing close to +/- 12% range. This is despite poor economic growth and large drawdowns on demonetization, GST, Covid etc.