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.