How to get good returns from equity

Do stock markets really reward you with higher returns for risks? That's a question worth asking today after the carnage in some stocks in the last six months. Taking stock of Indian stock-market returns today (June 1, 2018), there's good reason for scepticism, too. The Nifty 50 has managed an uninspiring CAGR of 8.2 per cent over the last 10 years. The top-performing liquid funds in the market have delivered a 7.9 per cent CAGR in the same period. Surely, that 0.40 per cent extra return is a poor reward for dealing with the stress and risks of equity investing. Given that fixed deposits in India often yield 7-8 per cent without much risk-taking, investing in stocks or equity funds would be worth it only if you can end up with that 12-15 per cent CAGR that financial planners talk about. That's not as easy as made out to be. The low-return challenge In India, most people shy away from equities because they fear the capital losses that stocks are notorious for. But they're worrying about the wrong problem. Given that bear phases in India have seldom lasted for more than three years, you could have avoided capital losses from equities simply by committing to a longer investment horizon. We ran a rolling-return analysis on the Nifty 50 Index from January 2000 to May 2018, covering three complete market cycles, to take stock of the five-year holding period returns at every month-end. The analysis shows that investors who held onto equities for five years on an average made a negative annualised return (capital losses) only 6 per cent of the time in this long 18-year window. That is, the chance of making a capital loss was only six in 100 if they held on for five years. What you should be worrying about, however, is the possibility of making a low return that fails to reward you sufficiently for equity risks. The same rolling-return analysis showed that, over the 18-ye

This article was originally published on July 18, 2018.