How much returns can one expect from the Stock Market?

I can confidently say that all of us know that people are making money from trading or investing in shares.  We also know a couple of other facts like (a) investing comes with high risks (b) the returns from shares are higher than from regular Fixed Deposits (c) Shares are traded through two exchanges BSE and NSE.

Perhaps, some of you are not aware of other facts, to name a few (a) BSE is in existence for over 145 years and NSE is there for the last 27 years, BSE is the oldest and NSE is the largest exchange in terms of trade volumes!  (b) 5500 companies are listed in BSE and less than 2000 companies are listed in NSE (only so few, shocking, right?) (c) Of which, only about 550 companies constitute more than 90% of market capitalization!! (revealing info?) (d) Index of BSE is called SENSEX and that of NSE is called NIFTY (e) SENSEX consists of 30 shares and NIFTY has 50 shares. (f) SEBI is the boss; I mean market regulator.

SENSEX was launched in 1979 with a base index of 100. Now it has touched 61700.

Around 7 Crore people have opened Demat accounts of which, over 2 crore accounts are newly added in the last 15 months. This data is important because there was no major correction since March 2020 and the SENSEX has given 28% CAGR since then. So, over 40% of the investors have not seen deep corrections or bear markets.

Having touched upon the basics, let us understand how much return one can expect from stock market investments.

I speak to many people who are trading in stocks. One of them was saying that he has invested Rs.10 Lakhs and earns around Rs.50,000 per month! Further, he goes on that he would consider retiring from his job soon and getting deeply involved in trading.

I feel he is the reflection of the current mood among the new investors. Going by the historical returns, can he continue to get this kind of return? I doubt it. Based on the past, at a CAGR of 14%, an average earning of Rs.12,000 per month on Rs.10 lakhs investment is reasonable.

A simple calculation can be like this. If one invests Rs.1 lakh in the market, it will double in 5 to 6 years, if you stay invested in really good stocks, for a really long period in the market. Do you know how many years are required to double money in Bank Fixed Deposit? Considering the present rate of interest of 5.5%, it takes 13 years!

Naturally, the stock markets give much higher returns when compared to fixed deposits in banks. Will it give 28% or astronomical returns as it is giving now? I have my reservations. Set the benchmark of 10 to 12% return per annum, or 2X of bank FD returns. Anything more you get, consider it as a bonus.

Some of you would have got high returns. I give credit for this to your sheer good luck. As you also know, luck smiles on you once in a blue moon.

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About B E Kumar Prasad

B E Kumar Prasad
He is a Practicing Chartered Accountant in Bengaluru, India. He has 28+ years of experience in income tax, business setup, and NRI matters. He is also an Insolvency Professional, Registered Valuer (F&SA) and Social Auditor.Prasad welcomes your comments and questions. Please email him at simplifiedlaws20@gmail.com

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