In the post, we use two methods to guesstimate returns over 15-year periods and suggest using a probable return range rather than point estimates. Also why setting conservative assumptions will likely pay off.
What is your expectation of annualised long-term return from investing in equities?
12% is the most common assumption plugged into financial planning models.
Data says India's "long-term" returns range from 7% to 20%, depending on when you invested. The way we set expectations needs to factor in this variability. This post explores two ways to set expectations for long-term equity returns.
The 12% number has some basis. That's how the index (NSE500) has done over the long term. The chart shows the outcome of a monthly 10k SIP into the NSE 500 since its inception in Jan 1995.
A 10k monthly SIP into the NSE 500 starting in Jan 1995, continuing uninterrupted over 28 years, would be worth 4.6 Cr in September 2023. A CAGR of ~12% and a higher XIRR of nearly 15%.
That's over nearly three decades. We examined what returns have been like over 15-year periods. Think of it as a period shorter than an investing lifetime but long enough to be considered long-term. We considered systematic investments and not one-time lump sums because that's how most of us invest.
Applying that same 12% annual rate to a shorter time frame of 15 years means your investment ₹ 18L (10k / month * 12 months * 15 years) should be worth about ₹ 50L by the time you complete your last SIP.
The chart below shows the ending values of monthly SIP portfolios with start dates in January each year from 1995 to 2008 (The chart ends at 2008 because 15 years from 2008 brings us to 2023).
These are values 15 years after having started investing. If long-term equity returns were written in stone, all those columns would be more or less the same height. They are not.