Now an iconic phrase, ‘Kitna Deti Hai?' was used in an advertisement by Maruti Suzuki to portray the Indian consumer’s deep-rooted mindset of seeking value against any purchase. A typical advertisement for an automobile usually highlights features such as fuel source, engine power, transmission and suspension or even fancier touches such as sunroof and audio system. However, for an Indian consumer, the most crucial piece of information before purchase lies in the answer to this question: ‘Kitna Deti Hai?’. In other words, the buyer is most interested in knowing ‘the fuel efficiency of the car’.

Now, this becomes a question of economics. All too often at the end of my sermon on equity investing, investors invariably raise the question ‘kitna deti hai?’ or ‘what will this investment earn for me?’

In the case of automobiles, manufacturers indicate a car’s fuel efficiency as per certain standards based on test conditions by an authorised agency. This number may or may not be indicative of the outcomes the car owner may experience in the real world. The reasons for this variance could be many, including condition of roads or state of traffic.

When it comes to equities, there is no such authorised testing agency, but a wealth of historical data. An investor can use this data to discern the range of outcomes that equities have delivered in the past. I understand that investors need to have a reference point to be able to incorporate it in their financial planning models and asset allocation process.

The problem of plenty

The problem that investors face in this respect is not ‘lack of data’ but of ‘too much data’ and the problem of plenty.

Are the returns of 2021 — when the Nifty 500 TRI (representing broader market) gained 31.6% — an appropriate assumption? Or are the returns of 2022 — when the Nifty 500 TRI gained 4.2% — a better estimate? Obviously, these widely varying numbers would lead to vastly different plans. Should the investor then think longer term and set their estimates based on the returns of the five-year period ended December 2022, when the Nifty 500 TRI gained 11.5% CAGR? What if investors really think long-term and consider the 10-year returns for the Nifty 500 TRI as of December 2022, which would be 13.8% CAGR? One can wonder if this is a trend and the longer the period, the better would be the returns. So, they swiftly pull up the returns for the 15-year period ending January 31, 2023, and the return drops to 9.8% CAGR.

These returns are what we call point-to-point returns, which are highly sensitive to both the initial conditions and the ending points.

Are rolling periods a better approach?

A better approach, therefore, would be to work with what we call rolling periods. For this analysis we have used 15 years of daily index (Nifty 500 TRI) data, starting January 31, 2008 and ending January 31, 2023. We take the daily data for the entire 15-year period and then calculate the return for every 1-year period. If the data starts on January 31, 2008, the first rolling 1 year period would end on January 31, 2009, the next rolling period starts on February 01, 2008 and ends on February 01, 2009.

Similarly, we could calculate returns for holding periods of 3 years, 5 years and 10 years. For example, the first 5-year rolling period commences from January 31, 2008, and ends on January 31, 2013. The advantage of this method is that it considers every possible five-year period during the period of analysis (15 years) rather than a sole period.

This method gives us 2475 data points for 5-year rolling returns for period, for which data was considered for 15 years ending January 31, 2023. The maximum, minimum and median of these 2475 rolling 5-year period returns provide useful estimate of the returns that one could use for financial modelling purposes. Further, it also helps us understand the range of possible outcomes, including potential stress based on history.

Rolling returns of Nifty 500 TRI (15 years period)

Source: MFI Explorer

Rolling Returns with daily frequency of Nifty 500 TRI at different time frames as mentioned above. CAGR – Compounded Annual Growth Rate. Data period: January 31, 2008 to January 31, 2023. Past performance may or may not be sustained in future.

The above table provides you with a range of outcomes for various rolling periods from January 2008 to January 2023. As you move down the rows (longer rolling periods) the maximum gains (per annum) begin to drop and the maximum losses (per annum) also reduce. The median outcome begins to stabilise and the entire range of outcomes begins to contract. The instances of negative returns drop as the rolling period increases and instances of returns above 8% rise as the rolling period increases. The longer your holding period (i.e., rolling period) as an investor, the more stable are your outcomes with the probability of a reasonable outcome rising. If you study the table and its underlying method of calculation, you will realise that this table mimics a daily SIP.

The objective of this exercise is to hold a mirror up to the past and use that as a rough guide of what the future might entail. I should add the caveat that mutual investors are familiar with: ‘The past performance of mutual funds is not necessarily indicative of future performance of the schemes.’ While this analysis is carried out with indices (Nifty 500 TRI), the same disclaimer would be applicable here as well: the past performance of the index is not necessarily indicative of the future.

The table provides unemotional historical data of our past trajectory. Investors could use these assumptions while making their asset allocation and financial plans and while managing risk.

As per my role and as an organisation, we educate investors on the benefits of investing in equities. We also help investors understand the advantages of choosing our schemes, which include seamless investment processes, a disciplined approach and the experience of the team. Our endeavour is to improve the fund’s performance by delivering alpha (outperformance) vis-à-vis respective benchmark index of the schemes over medium to long-term.

We return to the evergreen question at hand. I would profess myself to be of a cheerful disposition, guided by rational optimism about our future economic prospects and the quality of entrepreneurs and managers engaged in building and managing profitable businesses.

To the iconic phrase with which we began this blog, I wish to add an important corollary: ‘Kitna Chahiye?’. While equities can help you achieve your financial goals, they cannot appease your greed.

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