Yesterday, I was talking to a young relative of mine about how Sensex had touched 39,000 for the first time and how it had created immense wealth for investors in past years.
But despite being young, this guy was somehow not too convinced about equity’s potential for wealth creation.
So I thought I will try to influence him with some simple data. And once I did that, his mind started working in ways that I liked. Mission accomplished. 😉
I thought of sharing that dataset here.
It’s fairly simple to understand:
Imagine you can invest Rs 1 lac every year. So over a period of 20 years, you would be investing a total Rs 20 lac.
Now, what would be the value of these investments over the years?
I took the Nifty50 returns data of the last 20 years (since 1997-98) and showed the below table to my relative:
After investing Rs 20 lac over 20 years, the value of investments was about Rs 90 lac. This is when the investments were made in January every year.
A large figure of Rs 90 lac excited this relative of mine. But he had a valid question after that.
Since markets fluctuate, what would have happened if instead of investing in January, he invested in some other months?
So I showed him the data for months of April, July and October. Have a look.
By investing Rs 1 lac in April every year in Nifty50 for the past 20 years, the value of investments would have become Rs 87 lac. Not bad.
By investing Rs 1 lac in July every year in Nifty50 for the past 20 years, the value of investments would have become Rs 92 lac. Not bad at all.
By investing Rs 1 lac in October every year in Nifty50 for the past 20 years, the value of investments would have become Rs 94 lac. Not bad again.
Ofcourse the figures differ depending on the months we invest in. But the final figure still is good enough to show how wealth is created over the years when investing in equity.
And just to drive home the point, I also compared this with Rs 1 lac investment in PPF for the last 20 years. Here is what I found:
By investing Rs 1 lac every year in PPF for the past 20 years, the value of investments would have become approx. Rs 52 lac. Not bad but much lower than what was possible via equity.
(Source: PPF interest rate history)
Please don’t think that I am trying to portray PPF in a bad light. I personally like PPF and feel that PPF is a great debt product.
So if you understand the whole premise of asset allocation and also understand the need to have debt in the investment portfolio, then PPF is a great option. (Try this PPF excel calculator). But ignoring equities just because it can be volatile in short term is not wise.
Equity will go up as well as down. It is in its nature. It’s not a bank FD. But if you stick to it for long, the returns delivered are much higher than debt products.
And that is what I wanted to convince my relative about.
He seems to be convinced now. Whether he takes any action on this new found conviction is another matter.
I also shared with him the idea of investing on a monthly basis via SIP in equity funds if he (like most people) doesn’t have lumpsum amounts to invest. He got inspired by the several SIP success stories that one can easily find.
So if you too feel that someone needs a little push to consider equity for long term investments, then you can use the examples above to convince them.
Its a very good article, definitely equity has the best potential over long term.
But if I were that relative of yours, I will bowl you over with one delivery. What if the Jan 2020 returns is similar to the one in Jan 2009? a flat 50% negative return.
My 90 Lac will become 45 Lac and My PPF will beat equity.
So keeping invested for 20 years is only good if you keep changing your asset allocation. And part of that might include some corpus in PPF as well.
Agreed. Proper rebalancing is necessary to ensure that profits are protected in times of exuberance.
Hello Sir you said the things very well but just wanted to highlight one simple point that investment has to be goal based and then only would be able to balance the portfolio and enjoy the returns.
Your conclusion is incorrect – There is no guarantee that just because someone stuck to it for _LONG_ it will be fine @ end.
You are making the premise like in Bollywood movies – at the end everything will be good/fine/awesome. Absolutely not.
Now if your 20 year block includes 1992 – 2003 during this period Nifty was just flat, Flat for 12 years. Is there any guarantee that such a block will not happen for longer durations ? Absolutely no guarantee. Equity is volatile period. Just because one invested for 100 years does not mean they will end up with great returns. It depends on how the investor _managed_ the risk in their folio and their asset-allocation.
Hi… it seems that the tone of the article came out like that but I did not mean to portray equity as a FD with high interest. Nothing is guaranteed in equity investing. And I have written about it countless times earlier. Some links for reference:
https://stableinvestor.com/2017/09/tolerance-market-crash-risk.html
https://stableinvestor.com/2018/01/market-timing-india-case-study.html
The idea of this post and approach was to show the potential of earning comparatively higher and decent returns from equity in the long run over other comparable investment options.
I didnt had 1L to invest in 1990. I remember i started my Mutual fund journey with investing Rs 5000/- at 2003.. But yes Equiry is the best form of any return provided its monitored once in a year for perfect asset allocation and risk appetite and the goal.
Like if 20L investment fetches 90L worth of retun in 2018 ( last 20 years) . will it be the same in 2038 ( the next 20 years)..who knows?
But your approach is fantastic ..keep blogging.
Yes Mr Milan… equity is the best option for long term investing. Ofcourse what you say also is important to implement – “provided its monitored once in a year for perfect asset allocation and risk appetite and the goal”
What would be the impact of infltion in these 20 years?Will the value of Rs. 90 Lakhs be the same? Definitely not. Hence, instead on highlighting the absolute value, you should highlight the relative terms like ROI or XIRR.
Hi Sujit… Idea is to compare equity with other investment options available.
And its true that the value of Rs 90 lakh in 20 years would come down due to inflation. But the same inflation will be applicable on someone who invested in (let’s say) PPF. So even after accounting for inflation, equity is the better choice for long term – assuming a person is comfortable with equity.
But there is no denying that holding a portfolio with equity as well as debt is the way to go. One cannot ignore equity.
Dear Dev,If you invest 1 lakh per year,You will get about 90 lakhs after 20 years.But if you take inflation into account it’s actual value will be 42 lakh.
Hi Dr Bansal… Idea is to compare equity with other investment options available.
Rs 90 lakh in 20 years would be of less value due to inflation. But the same inflation will be applicable on someone who invested in (let’s say) PPF. So even after accounting for inflation, equity is the better choice for long term – assuming a person is comfortable with equity.
Very good article. When your investment became 21L from 42L in 2008, how many people will still stay invested. That is the biggest issue. If you see your profit evaporate once, then fear will rule your investment decisions and you will always sell once you got a small profit. How to overcome this?
How would this compare if invested in Real estate ? (Plots and land, not apartments). (if not 1 lakh every year, but investment of 20 lakhs with the help of loan)
do you have the same calculations for other months of year.
It’s a great article. I couldn’t agree more. Definitely equity has the best potential over long term. Thanks for sharing a valuable post.
Can you do similar calculation or possibly have already done if investment had been purely in index funds? Will there be a major difference?