Let’s start with a premise. Let’s say you believe as I do, that India and its economy is likely to do well for the next 10-15 years. I think it would be safe to assume that the Indian economy would grow between 5-6% for the next 10-12 years.
If you agree with the above point, the nominal growth (real growth – 6% + inflation) is likely to be in the region of 10-12%. If the nominal growth of the economy is 10-12%, then the top companies in India are likely to grow at the same or slightly higher amount over the same period of the time.
The top companies in India are represented by the Nifty 50 or BSE sensex and hence we can expect that the index would grow by 10-12% over the next 10-15 years. It is quite possible that the returns will fluctuate wildly from year to year, but over the long term the returns are likely to average more than 13%. The actual returns for the last 15 years have been around 13-14% when the growth rate of the economy was much lesser.
If you agree with my logic above, then this is my idea -
If one invests in the index via a systematic investment plan (SIP) in a low cost ETF or mutual fund on a monthly or quarterly basis, the overall returns should be fairly good with moderate or low risk over the next 10-15 years.
So where’s the catch
There a two issues. The first issue is discipline. A lot of people equate excitement with high returns and end up with low returns and lots of disappointment. As a result, due to ignorance or mistaken beliefs, they will not follow a simple and sensible plan which could provide good returns at low risk.
The second issue is the validity of the hypothesis that India will do well and not go down the drain. For starters, if it does then all of us will have more to worry than the stock market alone. I sincerely hope that it does not happen, otherwise all bets are off
So are you doing this ?
If I could go back in time and meet the Rohit of 1990’s, I would kick his ass and ask him to start an SIP program in the index or a decent mutual fund instead of chasing some IT stocks. Well, I can’t do that :). So I have done the next best thing – I have an SIP plan for the last couple of years and have kept at it irrespective of the market levels, near term outlook and any other forecasts and prophecies.
I have discussed this approach with several of my friends and have yet to meet anyone who has taken up my suggestion. I think there is a perverse thinking that decent returns require some complex insight and a simple ideas such as this is too good to be true.