Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Charts & Analysis

Nifty Needs To Go Up 50% to Recover Inflation Adjusted High

If you look at the Nifty and it’s all time high of 6300, we are just 7% below it right now, around the 5900 levels.

But if you adjust for WPI inflation – a component that is still substantially lower than consumer price inflation – we are 50% away from the highs.

image

 

I’ve taken the Nifty monthly chart and adjusted every month for the inflation indexed since then, so we are speaking of the Nifty in 1994 terms. In those terms, Nifty must make another 50% after inflation to realize its highs.

Some of you are thinking, but what about dividends? Dividends add about 2% a year or so, but they can be useful in cutting some of the inflation downside. The Nifty “Total Returns” (including reinvestment of dividends) is only available since 1999, and here’s the deal:

image

The Nifty needs to rise 44% to recover its highest purchase value, even after considering reinvestment of dividends.

This long term buy and hold is now getting more and more suspect. Given the headwinds, I think we see another huge drop in the index.

I should also chart the Nifty in dollar terms and see how THAT has done. There’s even an index for that called the DEFTY. Coming soon, to a blog post near you.

  • Kaushik says:

    Wonderful Deepak! These are unadultered real charts which we dont find anywhere else. Nice to see how we have prospered on absolute basis.I love this because we talk a lot individually on each terams but on a common perspective this is what truly looks lime.

  • lohit says:

    A simple no brainer SIP started in May 2007 into the Goldman Sachs Nifty ETF would have yielded 6.86% p.a . The Franklin India Nifty Index Fund (growth option) returned 6.93%.
    A SIP in the Nifty Junior ETF would have returned 11.11% over the same period.
    Buy and hold – maybe not. Buy consistently and hold – certainly yes.
    Note – I did not include brokerage charges for the SIP (about 0.3 to 0.5%) in the above calculation. Also these returns assume dividends are reinvested.
    Offtopic, but actively managed Mutual Funds are a serious waste of money. As with most things in investment, I have learnt this the hard way.

    • Lohit: Let me bite. I took the Nifty Bees – the same Goldman ETF you mentioned – since 1 june 2007 and got this return graph at 6.86% annualized return. And then, I adjusted the amounts for inflation – that is, increased the SIP amounts you invested in 2007 to the 2013 terms. The annualized return was a NEGATIVE 0.3%. Net of inflation you would make nothing.
      The Junior’s done better in that respect but then again it depends on when you begin and where you end.
      Also about managed funds – even HDFC Equity – which was probqably the top fund in 2007 and isn’t at the top now, has given a 10%+ return compared to Nifty BEES’ 6.86% on an SIP since 2007. And that doesn’t include theentry load that used to be charged then, but still, the outperfomrance is 4% a year. Even a balanced fund (by definition a managed one) has done better – HDFC Prudence has done more than 10%. In fact an SIP into a liquid fund has returned 7.7% in the last five years.
      It would actually have made more sense to either buy a managed fund or a debt fund in the last six years…just saying.

  • Swami says:

    Not sure if you have had time to look at markets that have data available for longer horizon. US markets similarly have been flat for periods as long as a decade and even US had 20%+ inflation in 1980’s (rem death of equity article by business week in 1979, i think). Most equity returns come from a short burst (like india, 2004-07), I expect some one like you to make more qualified statements rather than use 5-7 years of data to scrap buy and hold strategy 🙂

    • Buy and hold doesn’t really work and I’m not the first one to question it! The US markets too have had long times of underperformance. If you buy and hold and you have to exit (liquidate due to emergency or such) at a time of such underperformance you’re screwed aren’t you?
      I agree with the fact that equity returns come in a short burst but honestly, that calls for an exit even more!

      • Swami says:

        if you agree that equity return comes in short bursts, then your ability to make returns would depend on ability to forecast when will the burst come. Most academic research suggests that ordinary mortals are not capable of predicting the burst period and in fact are prone to buy at the wrong time.
        Buy and Hold strategy adressess behavioral and emotional issues of investing and I personally believe is the way to beat inflation over long period.
        that said, in order to make returns its really important for people like me to have other folks that believe in their ability to forecast market and thus ensure that we can enough liquidity in market to buy and sell.

        • This is where I disagree again. Buy and hold is not the alternative to not being able to predict bursts on “average”. The answer lies in survivor bias – when people fail at trades they drop off and others take their place. The winners stay. So on average you’ll have losers. Buy and hold may not work for the time frame you care about and in the end that’s all that matters. It could have worked for 50,000 people you know, but if it doesn’t work for you, it doesn’t work.
          I would recommend a strong assessment of an exit strategy. It could be systematic (i.e. P/E Above X, market way above 200 DMA etc.) or macro based (interest rate cycles, economic cycles)…and in the limited Indian history it isn’t easy to back-test them, but they have been done in other countries – shifting asset classes. In fact some paper went to the extreme and said asset allocation determined most of their alpha.

        • Swami says:

          asset allocation papers you are referring assume static allocations and therefore presume buy and hold. Little research exists on TAA (tactile asset allocation) and its longer term success compared to static allocation.
          None of the known exit strategies seemed to have worked over long periods..and people usually miss out the periods of bursts only to buy high..issac newton was a good example

        • No, no, tactile wala research exists too, though I don’t know about hte public domain.
          Also disagree about known exit strategies. From the short term to the very long term, people have made consistent exits and that’s worked well; I don’t believe you need to get out at the top and get in at the bottom of any cycle – even if you missed teh first bit and the last bit the meat in the middle is what makes the return…

  • Swami says:

    sorry, I forget to add that that screw up when you are required to exit under long period of underperformance is common characteristics of all major asset classes..look at Gold in USD terms, real estate buys (even nariman point, I believe) etc.. expect probably fixed deposits that consistently perform and good luck to anyone who wants to invest in them for long horizons.

    • Swami says:

      90% of trading today is done by institutional investors with phd analysts and you believe that exit strategies work 🙂

      • So how come I don’t see any phd analysts among the richest investors in the world, huh? 🙂 Obviously a degree isn’t something that assures investment success.

        • Swami says:

          possibly you dont know the people who manage the funds of these richest investors..as far as I know most of them employ skilled people. not far even our azim premji ..besides the point, if exit strategies work then basically you are saying that active investing works, ok.

        • Well, not the George Soros or Warren Buffett types. Of course active investing works! It may not work for *you* because you don’t have the time to devote to it. But of course it works.

  • lohit says:

    >The annualized return was a NEGATIVE 0.3%. Net of inflation you would make nothing. The Junior’s done better in that respect but then again it depends on when you begin and where you end.
    The same reasoning applies to your post as well. You have taken the high of the Nifty as your reference.That is why I chose May 2007 (when the Nifty was at high) as my start point.
    >>Also about managed funds – even HDFC Equity – which was probqably the top fund in 2007 and isn’t at the top now, has given a 10%+ return compared to Nifty BEES’ 6.86% on an SIP since 2007. And that doesn’t include theentry load that used to be charged then, but still, the outperfomrance is 4% a year. Even a balanced fund (by definition a managed one) has done better – HDFC Prudence has done more than 10%. In fact an SIP into a liquid fund has returned 7.7% in the last five years.
    Two mistakes here.
    1. You compare against the wrong benchmark. From valueresearchonline
    Average marketcap of companies held by HDFC Prudence – 8600Cr
    Average marketcap of companies held by HDFC Equity – 24500 Cr
    Average .. of Nifty ETF – 106000 Cr
    Average .. of Nifty Junior ETF – 17700 Cr.
    So you should really compare these funds against the Nifty Junior ETF.
    2. Hindsight error – Ex-post it is easy to find funds that did better (In this case that is also not true).
    There is a wealth of research as to why passive investing is much better over a long term. Why else do you think Index funds and ETFs are so popular in the West?
    The one complaint I have is that both Index funds and ETFs here are still very expensive. The Nifty ETF – 0.5% expense ratio, Junior ETF – 1% .

    • First – time frame was as given by you originally 🙂 I can take any timeframe, but in the end it’s about a timeframe one considers as decent. The post talks about Nifty adjusted for inflation since inception (for “no dividends”).
      Second about the two mistakes.
      1) There’s no mistake here. These funds are benchmarked to the Nifty, not the Junior. You can’t tell a fund that it has to be “managed” and then dictate the market cap of the companies it invests in. If you want a fund that wanted to benchmank against a smaller index (CNX Midcap) you can try SBI magnum global that returned 13%+ since 2007.
      2) I’m not speaking ex-post at all. Remember I said that these funds were top rated in 2007 and not now? Ex-post I can find funds that are top rated now and nowhere in 2007 which have beaten the heck out of the managed ones. Btw, these are funds I used to mention way back in 2007 on this very blog – see https://www.capitalmind.in/2006/12/tax-saving-schemes-wait-till-march/ (in one of the comments).
      Btw, I’m with you in that indexing is not likely to work going forward 🙂 But I like to play devil’s advocate to my own arguments, often vehemently, to keep myself honest. I believe there are good reasons why fund managers beat the Nifty or the Junior in the last ten years including a lot of insider info, the ability to front-run a lot of guys, great commissions, a strong economy, the kind of inflation good for stocks, negative real interest rates etc.
      And I agree that 50 bps is ludicrous for a low cost ETF….

      • lohit says:

        > There’s no mistake here. These funds are benchmarked to the Nifty, not the Junior.
        That is the mistake. The funds are choosing mid and small cap companies and then conveniently chose the Nifty as their benchmark?
        I agree that it is their prerogative, but surely an inquisitive mind will ask questions of it. Essentially, they are investing in higher risk assets (mid/small cap) and then benchmarking themselves against a lower risk one (large caps). How is that fair? At the very least, returns should be adjusted for risk or they should pick the right benchmark. Otherwise it is just plain unethical if you ask me.
        >Btw, I’m with you in that indexing is not likely to work going forward 🙂
        Actually I have the opposite opinion. Over a 15-20 year period, I am confident that for the average investor, a simple SIP into an index-fund or ETF will beat 95% (or possibly all) of the fund managers. Of course, in this measurement you should include the funds that died out too. Otherwise, survivor bias will come into play.

        • 1. Wrong again. They benchmark against whatever they want to benchmark. I question why the nifty, but it is simply the most noted thing in the landscape (like the Sensex). They should strive to beat an Index, any index. How they beat it is not really my concern or anyone’s – that’s why you pay them, and if you don’t like it, exit. But you can’t deny they beat the index they wanted to beat, which is the opposite of the thesis that active management doesn’t work. If you want to beat the Junior, you have to find funds that want to beat the junior and see if they have performed.
          If you want to adjust risk you could do some layer of risk analysis on the fund NAV – like a negative deviation from the index which gives you an idea of how much more risky this fund is. There’s nothing unethical about this – anyone with the data can do this, the mutual fund doesn’t need to, however I would encourage everyone to work out this info.
          2. I’m sorry I mean to say that active management may not work going forward 🙂 My bad. I think the index mechanism is a good and sound too, if you don’t have time to analyze markets. However the active funds have done very well in the past and if you look at 5-10 year horizons you will see huge outperformance by funds in the past, and it’s not really correct to ignore that.
          Survivor bias isn’t so apparent – as I have said I mentioned these very funds six years ago, and in fact there were many posts in which I thought they were good. SBI contra was actually the third mentioned in that comment which has done not as well (but still just as well on an SIP basis as the Nifty BEES)

        • lohit says:

          “Wrong again. They benchmark against whatever they want to benchmark. I question why the nifty, but it is simply the most noted thing in the landscape (like the Sensex). They should strive to beat an Index, any index.”
          Sorry, I think you are missing the point about performance measurement here.
          You are essentially saying that you could not care less about the benchmark that they chose. So in theory someone could start a short-term debt or a gsec fund and benchmark it against a liquid fund index and advertise how much they beat the benchmark by. In your eyes, would that be a good fund to buy just because they beat ‘an Index, any index’? Should the fund manager be given any credit for this ?
          To truly measure the fund (managers) performance, you should benchmark it against a comparable basket of assets. A true apples to apples comparison.

        • You’re quoting that out of context mate. It doesn’t matter what they buy in terms of asset classes. It doesn’t matter what they index to. It doesn’t even matter if they beat that index. It matters only if that index matters to you. The nifty matters to a lot of people. The junior nifty, not so much. It matters to you then you compare funds that invest in the second rung; the midcaps or the junior nifty stocks – and as I’ve said, one fund that was brilliant in 2007 (in the sense of my actually having mentioned it on this blog again) has beaten the Junior Nifty, SIP wise. I like the Junior Nifty myself, and had invested in both SBI magnum global and the Junior Nifty. But it seems the return has been better for the SBI fund, strange but true.
          If you have the time to make such detailed comparisons why not directly invest in stocks? The “average” individual who wants to invest doesn’t give a rats ass about whether one fund buys large cap stocks and another buys small cap. They care about returns and risk. They care about big indexes (sensex/nifty) not the broad ones (top 100/top 500. (I hate this too – I think the junior is far better composed than the Nifty)
          IF the risk is the same they’ll think of return comparisons no matter what each one invests in. At the basic level, there is just one thing: equity risk. They need to make great returns post inflation, is what every investor wants. If I buy and I don’t get inflation-plus returns, and still see big intermediate downsides, it’s bad.
          Let’s not get into semantics. My point is that SIPs in active mutual funds have beaten similar strategies in index funds even without survivor bias (i.e. choose top funds in 2007 and SIP into them till now). My point is that buy and hold doesn’t necessarily work in the timeframe you’re looking for (five years ago, five years was the perfect long term timeframe), net of inflation.

  • ClownPrinceG says:

    Hi Deepak,
    Excellent post. Something I long suspected but didn’t have enough skills or data to analyse the way you did.
    Philosophically looking at all this: while we keep on depleting the natural resources, in no possible ways there can be growth. That’s an un-economic view of things.
    In reality also, what we are all doing is, converting the ‘natural currency’ to ‘trade currency’ and calling it growth. Once ‘natural currency’ becomes scarce, it of course starts telling exponentially on ‘trade currency’. I think that’s where we, this generation, are: inflection point of ‘natural currency’ turning the tide on ‘trade currency’ and subsequently, the whole of economy.

  • lohit says:

    You say “They care about returns and risk.”. Which is exactly my point. You cannot compare two funds with different risks and merely on the basis of return say one is better than the other. If the asset composition is different, then one should not compare mere returns to judge performance.
    “IF the risk is the same they’ll think of return comparisons no matter what each one invests in.” – Aha. But the risks are not the same. That is my point I have been belaboring upon in every post of mine. To the average person, maybe a Top 100 fund is no different from a small and mid cap fund. They are just equity funds with risk.
    But for the discerning folks on capitalmind, they are different and should be 🙂
    You say – “My point is that SIPs in active mutual funds have beaten similar strategies in index funds even without survivor bias (i.e. choose top funds in 2007 and SIP into them till now).”
    I would say the right way to judge them would be to find a comparable (and investible) benchmark with a similar risk profile. Dont go by what the fund manager advertises as his benchmark. Look at the asset composition of the fund and then choose the right benchmark. Do that, and my guess would be that 9 out of 10 of these so called ‘top funds’ in 2007 or 2003 or whenever would have failed to beat it.
    You are paying these guys top dollar – 1.5% to 2% of the AUM. Make them work for it.
    I am not convinced with your answers, and I guess neither are you with mine :).
    Last post on this. After this let us , as the cliche goes, agree to disagree.

    • “You cannot compare two funds with different risks and merely on the basis of return say one is better than the other. If the asset composition is different, then one should not compare mere returns to judge performance.” -> I’ve come to the point where I disagree strongly with this. I used to think exactly this but now I believe all equity products can be compared with each other. You either compare with one index (I don’t like Nifty but it’s the one thing that works) or you try and get positive inflation adjusted returns. I think we need to make finance simple for people!
      I understand that some readers will be really good and in that case I must ask: why not invest in equity? It gives you much more leverage 🙂 except in debt funds where you can’t invest directly anyway…
      On the fund side – I’ve shown you how the top funds in 2007, not “so called” but they were really top funds then – like HDFC equity have beaten the index and index funds. Composition doesn’t matter, really, since it will change every month for an active fund anyhow. “Average” market cap doesn’t matter because what you really care about is “weighted” market cap and I think you’ll find the weighted mkt caps close (see the top holdings of the funds). Honestly, that analysis is too painful to do to figure out where a fund lies, in the mid cap world or the large cap.
      Btw, There’s an index called CNX Midcap, which I think is useful as an ETF investment now that Midcaps have died 🙂
      Agree to disagree!

  • lohit says:

    I said “Do that, and my guess would be that 9 out of 10 of these so called ‘top funds’ in 2007 or 2003 or whenever would have failed to beat it. ”
    May I suggest a long term SIP comparison of the top funds as a future topic for capitalmind. I am glad to stand corrected if the data proves otherwise.

  • Jai says:

    Lohit / Deepak,
    HDFC Equity is benchmarked against BSE 500… Not sure why do you say its bench marked against Nifty…
    http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=219
    Thanks
    Jai

  • ActiveInvestor says:

    Well sir, Your comparing the performance of an index and top funds but really , had you invested in a company like TTK Prestige in 2010 , you would have 30x your money . In reality , buy and hold works , but not in all stocks , buy and hold companies like TCS , Lupin, Sunpharma , ITC etc these are just large caps, there are also mid caps and small caps, say Eicher which has given steller returns but even in buy and hold companies , one should know when to exit