5 mins read . 04 Jul 2023
As we write, the Nifty and the Sensex are in uncharted territory. Just about 10 years back, if someone had spoken about 100,000 Sensex, it would have been dismissed as mere speculation. With the Sensex at 65,000, that does not entirely look impractical. What has led to this latest rally in the Sensex to 65,000 in a short span of time? To a large extent, it was the FPI flows of $11 billion in May and June 2023 that boosted the prospects of the Indian markets. To add to the good news, the current account deficit (CAD) came in sharply lower for the March 2023 quarter at 0.2% of GDP. Of course, the mega-merger of HDFC Ltd and HDFC Bank also provides the base for fresh flows. But the bigger story is about Sensex as an asset class.
When we talk of passive investing, we normally refer to pegging the returns of your portfolio to a passive and diversified index. Sensex offers one of the best examples for Indian investors. One of the advantages of passive play is that you do not overly bother about taking stock positions or in active management. Your focus is purely on allowing your portfolio to mirror an index and concentrate on reducing the tracking error. That is what index investing is all about and Sensex funds have been among the top-performing funds in the Indian market over the last few years on a consistent basis. So, today, it is not just that there is an asset called the Sensex, but it is also possible to use the index fund or index ETF route to take mirror positions on the Sensex. But, how would such a position have performed.
The best way to assess an asset class is to look at the long-term consistent returns. Obviously, over the longer term, volatility and cycles are part of the game. Hence we look at CAGR (compounded annual growth rate) returns on the Sensex. Sensex has the base year of 1979, so it has a full 44-year pedigree and history to look back upon. Let us just focus on the end points. The base value of Sensex was 100 and today it is 65,200. In short, an investment of Rs100 on the Sensex in 1979 would have grown to Rs65,200 in 2023; over the last 44 years. The real story (hold your breath) is in the CAGR returns. This translates into CAGR returns of 15.8% compounded over the last 44 years. In addition, the Sensex has had an average dividend yield of 1.5%, so we are looking at effective CAGR returns of 17.3% on the Sensex consistently over the last 44 years. That is phenomenal returns over such a long period of time.
To make it more credible, we also look at SIP returns on Sensex over the last 44 years. We know that the average CAGR over 44 years on the Sensex has been 17.3%. Had an investor just invested Rs1,000 per month in the Sensex each month for 44 years, how much would that be worth? It would be worth a whopping Rs13.42 crore. But that is not all. Your SIP contribution over the 44 years would have been just about Rs5.28 lakhs. That means; out of your corpus of Rs13.42 crore in FY23, your own contribution has been just 0.39% with 99.61% contribution to your wealth coming from Sensex growth. That really puts the Sensex story in perspective.
The moral of the story is that equities have been the best wealth creators over the long term and that is borne out by numbers. A passive Sensex strategy is good enough to create equity wealth. That is what Sensex at 65,000 is a reminder to all investors.