Nifty at 10,000 is exciting, but take a look at government bonds for better returns

By: | Published: August 9, 2017 1:51 PM

Nifty has grown by 10x in 21 years of its history. In CAGR terms, it amounts to a growth of 11.59%. Is it worth it, given the risks associated with equity investing?

Stock market, Stock market investors, BSE benchmark Sensex, BSE, capitalisation of BSE-listed companies, total market capitalisation of BSE-listed companies, late morning tradeNifty has underperformed even S&P BSE Sovereign bond Index as well as Nifty 15 year and above benchmark Index. ( Image: Reuters)

This year has been nothing short of historic for India’s equity markets. Nifty 50, the broader of two benchmark indices, hit the long-awaited five-digit mark of 10,000 points for the first time ever last month. The street erupted with joy as experts and investors welcomed the news. The month was significant in more ways than than one, as a lot of Nifty heavyweight companies declared their quarterly results for the Apr-Jun quarter, giving a glimpse into improving corporate earnings scenario. We also heard a lot of bullish commentary on the future of the Indian equity markets as several experts shared optimistic outlook for Sensex and Nifty.

The Nifty 50 was launched with a base value of 1,000 in April 1996, more than two decades ago. It took nearly eight years for it to double and reach the 2,000-figure in 2004. The next 100% growth came just in a quarter of the time it took to reach 2k, as the index zoomed past the 4,000 mark in 2006, which is often touted as one of the best years in the Indian stock markets with Nifty returning a whopping 40%.

From there, the growth actually sort of slowed. It was only in September 2014, that Nifty added another 4,000 points to reach the figure of 8,000 points. Almost three years later we stand at the 5-figure mark of 10,000. And now for the returns.

Nifty has grown by 10x in 21 years of its history. In CAGR terms, it amounts to a growth of 11.59%. Is it worth it, given the risks associated with equity investing? The markets have been very reactive to global events, denting the returns further. From the highs of 6,274 levels in January 2008, the Nifty plunged to 2,500 levels in October 2008, wiping off gains made over more than three years. If you were invested in the market during that time, it would’ve indeed been heartbreaking to see your money reducing to nearly 40% of the original amount invested.

Are there any alternate ways of investing without taking on the humongous risk that investing in the Nifty 50 entails and still get decent returns? It seems there are: Government bonds.

The “Nifty 15 year and above G-Sec Index” was launched on January 3, 2011. The index is constructed using the prices of top three (in terms of traded value) liquid Government of India bonds with residual maturity of 15 years and above, and having outstanding issuance of over Rs. 5000 crores. The index measures the changes in the dirty prices (including accrued interest) of the bond basket. Since its inception less than seven years ago, this index has a CAGR of 10.79% (as on 28 July 2017). In comparison, the Nifty has grown at an annualised rate of just 7.78% (from 6,157.6 on 3 Jan 2011 to 10,014 on 28 July 2017) in the last six-and-a-half years. That the returns pale in comparison to a highly risk free Gsec benchmark is indeed very intriguing. Rajat Sharma from Sana Securities says that the yields have seen an upswing in the last 3-4 years, on the back of many rate cuts. In fact, the bank fixed deposit rates have fallen from 9% in October 2014 to 6.75% levels in July 2017.

Not only this, the Nifty has underperformed even the S&P BSE Sovereign bond Index. The S&P BSE India 10 Year Sovereign Bond Index is a rules-based, transparent index that seeks to measure the performance of the 10-year Indian sovereign bond. The index was launched on January 7, 2014. It has grown at CAGR of 11.03% in three years time.

A look at these figures would leave one wondering why is there all this fuss about Nifty 50 reaching the 10,000 mark.

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