Note on Return Expectation from Investments!

Most of us invest in equities and bonds, so let us understand what could happen if we invest at the current market levels or yields. Remember – these are not predictions, but ‘indicators’ based on past events.

• Equity investments: One indicator that can help set return expectations is the Price to Book* or P/B Ratio, which is a relative valuation indicator to gauge ‘price attractiveness’.Currently, Nifty 50’s P/B is 3.96, which is much higher than the 20-year average P/B of Nifty 50 at 3.5. This means markets are currently more expensive than the long-term average. (Market movements also move this metric up or down. For instance, in Jan 2008, Nifty 50’s P/B was expensive at 6.4, while in March 2020, Nifty P/B seemed attractive at 2.2)One way to think is to look at similar periods of time from the past when markets were in an ‘expensive valuation zone’ (for instance, periods when P/B percentile was above 80 compared to its history- which is the case currently), and seeing how the next 7 years panned out. Similar times from the past saw this range of returns:7 year returns:
  Average: 9.4%
  Min: 4.9%
  Max: 18.5%

  Both the Min & Max values are outliers, so please do not set unreal expectations based on these- this is just to give you a sense of the range investors could have earned. And why a 7-year time horizon? Because Equity investments should generally have a very long-term minimum investing horizon.

  Source: Internal, NSE, data as on Dec 31, 2020.

• Fixed Income investments: Interest rates (what to expect as interest from an amount you save/invest) in India and across the Globe are at historical lows. Lower interest rates usually mean lower potential returns from bonds.Based on the current prevailing interest rates of 5.51% (considering 5-Year AAA Corporate Bond Yields) and looking at the times from history when the interest rates were comparable to where they are today, let’s see what happened over the 5 year returns immediately after:5 year returns:
  Average: 5.4%
  Min: 4.1%
  Max: 7.1%Again, both the Min & Max values are outliers and should be used to get a sense of the range.

  Source: Internal, Bloomberg; data as on Dec 31, 2020; 5 yr returns are for CRISIL Medium Term Corporate Bond Index.

Happy Investing!

RaVi

The above note is prepared by DSP Investment Managers. This is not a recommendation to buy or sell and FundWallet is a AMFI Registered Distributor of Mutual Funds. FundWallet is a empaneled Distributor of DSP Mutual fund Products. Please read the Offer Documents of Mutual Fund schemes before Investing.