Let the Return Expectations be Realistic!

The recent decline in the Indian equity market has been a jolt for many investors, and understandably so. In the last one month, major equity indices have been down into high single-digit and some of the sectoral indices are even down into double-digits. The pullback, driven primarily by foreign institutional investors’ (FIIs) relentless selling (higher than even March 2020) due to valuation concerns and earnings downgrades and maybe the China effect, has dampened the spirits of retail investors hoping for a more consistent rally.

However, despite this drop, it’s worth noting that the Indian market, as represented by the Nifty, has been one of the best-performing equity indices globally over the past year and the best among the emerging markets since the start of 2023. In fact, over the last two years, the Indian market has surged by more than 35 per cent, translating to a substantial 15-16 per cent annual return.

While these returns are impressive, it’s crucial to revisit what is realistic to expect from the markets over the long haul. Historical data reveals that the five-year rolling median return of the Sensex, dating back to 1979, hovers around 13.5 per cent per annum. This long-term average is the bedrock of reasonable return expectations for any equity investor in India. Yet, a new breed of investors, particularly those who entered the market during the corona virus-triggered pandemic period, have come to expect returns upwards of 20 per cent annually—a threshold set by recent, extraordinary years in the market.

The pandemic-induced market surge, with the Nifty climbing nearly 3.3 times from its March 2020 lows, was indeed spectacular. Broader equity indices, too, witnessed greater growth. However, these returns are largely a product of the ‘base effect’ caused by the market’s subdued performance before the pandemic and the fall throughout its duration. Such a pace, while exhilarating, should not be mistaken as the new norm. Realistically, these accelerated gains are more the exception than the rule.

Having observed the market’s cycles for over three decades, one insight stands out: investing is a marathon, not a sprint. Recency bias—the tendency to expect the future to mimic recent performance—can be a powerful and often misleading influence. The dotcom boom of 1999-2000, for instance, delivered returns exceeding 50 per cent, only to be followed by a sobering bust that left the markets subdued for years. The ramifications were felt deeply by retail investors, with individual ownership in NSE-listed companies plummeting from 18 per cent in 2001 to just 8 per cent in 2010, only stabilising around 2012.

History has shown us that no rally lasts forever, and neither does a downturn. Today’s market dynamics differ in several important ways. With a vast amount of readily available information online, vigilant exchanges, and an active regulatory environment, investors are better informed than ever. The chances of extreme, unchecked events like the early 2000s are far less likely. However, this access to information doesn’t guarantee understanding or wisdom, and that’s where a balanced return expectation becomes vital.

Investors who enter the market expecting consistent, sky-high returns are often disappointed and may exit prematurely when the markets correct. In contrast, those who align their expectations with long-term averages are more likely to ride out the lows and remain invested through the highs, reaping the rewards of patience and perspective. Staying grounded with a realistic return target—around 13-15 per cent over time—allows for a smoother investment journey

Ultimately, it enables investors to benefit from India’s growth trajectory without getting blindsided by the natural ups and downs of the market. As we approach the Diwali season, may the light of wisdom and knowledge shine brightly on your financial journey. Let this festive period remind us to set our sights on long-term prosperity with balanced expectations, allowing us to celebrate many years of wealth creation together. Wishing all our readers a very Happy Diwali!

RAJESH V PADODE
Managing Director & Editor