A lot of people ask me this question that my mutual funds are in loss, and instead of gaining some money in last 3 or 4 years i have lost from my principal amount also.
Then they look at Fixed deposit returns and say that had I invested in FD , I would have atleast gained something, but i made a mistake by investing in the stock market, so for all the people who feel this way that they have made a mistake by investing in share market i would like to say that so far you have not made any mistake but you will make one if you decide to exit in loss.
To understand this let us have a look at what the most respected investors and businessman around the world have to say on this.
So as per Mr. Warren Buffet, you will loose money if you are impatient in the stock market.
Mr. Bill gates has similar views on importance of Patience in life for succeeding
Mr. Charlie Munger says you can make big money in the stock market only by waiting, and not by frequently buying and selling stocks.
So all these successful people lay emphasis on the importance of PATIENCE.
Now let us try to understand this with the help of example of Nifty. Nifty is the index for National Stock Exchange and it comprises of top 50 companies of the country representing different sectors.
Its value was 1000 in 1995 when it started, and now it is close to 11000. So in a period of 25 years it has grown by 11 times. So if you had invested an amount of 1 lakh in nifty in 1995 it would have grown to 11 lakhs today.
But this has not been a smooth ride, their have been manys ups and downs in this journey like their was a major crash in 2008, than again this year 2020. But Despite this Nifty is growing at a CAGR of 10 to 12 percent from the starting point.
This CAGR value keeps changing with time, like when the market crashes it falls below 10 percent and when their is a bull market it goes above 12 percent. But between 10 and 12 percent is the long term average CAGR return.
Another important thing to note here is that over a long period of time nifty has always given better returns than the FD.
If you look at the Nifty curve than you will find that their are periods of outperformance as well as periods of lull in nifty ,when it did not give significant returns over a long period of time.
Between 1995 and 2019, in these 24 years, Nifty has given positive returns in 17 years and it has given negative returns in 7 years.
From these 17 positive return years Nifty has given more than 20 percent return in 10 of them, while in 4 of these years it has given returns of more than 50 percent in a single year.
67 % return in 1999, 71 % return in 2003, 54%return in 2007 and 75% return in 2009.
While once in these 24 years Nifty has given a negative return exceeding 50 percent. that is -51 % return in 2008.
So their have been many ups and downs in the market but you wont be able to take advantage of them if you are not invested throughout. Nifty has at times given very high returns in a single year also(as mentioned above), but since no one knows when those years will come , so the only way you can take advantage of those high return years is by staying invested throughout.
Another mistake that many people make is booking profits very early so they are unable to reap full benefits of the bull run. For example someone invested in nifty in 2002 got a good return in 2003. But if that person booked profit and decided to wait for the market to fall so that he can enter again than in that case he would have missed entire bull run of 2003 to 2007 and would have got chance to re enter only in 2008 market crash.
To cut it short, do not try to time the market as no one can, and staying invested is the only way through which returns can be maximised.
Now if someone is worried that market is not performing for many years than remember these are all phases of the market.
Lowest return that the market has given in a single year is -51 percent and the highest return that it has given is 75 % and 68% of the times returned turned positive in a single year.
If we see for a three year period than lowest returns in any three years on nifty are -27 percent and highest returns on nifty are 130 percent, and the probablity of returns turning to positive has increased to 91%
Now in any 5 year duration , nifty has never given Negative return so far and return has been in range of 21 % to 213%
For 10 year period return range is 99% to 258%, and for 15 year period than it is 254 to 324 percent return.
So now if we compare the worst performance of nifty in any 10 year period so far than it has doubled the money in that time and if we consider the current FD rates between 5 and 6 percent than it will take between 12 to 14 years to double money at this rate.
So over a long period of time Nifty index returns easily beats Fixed deposit returns.However please remember that here we are considering only Nifty, individual mutual funds and shares can have a better or poorer performance than nifty.
To summarize the key to investing is to select good funds, or select an index fund and than invest in it for long term. Be patient without getting affected by the volatility of the market.
Bhaskar sankhla 