The link between GDP growth and the broad market index
As I breezily recommend an index fund to anybody who is risk averse and still wants “better" return than a bank deposit, I forget to take into account a slice of the reader and viewer segment which does not know the assumptions or the formulae behind this sweeping prediction of the future that I like to make: Indian equity will give an average return of about 15%, year-on-year (y-o-y), over the next 10-15 years. You’ve heard this statement over and over again so often that it almost seems like a basic rule. But it takes a vigilant reader of the paper to ask the obvious question: what is the basis of this statement and if past returns do not guarantee future returns, how can we predict what the markets will do in the next few years? Writes Anantha Padmanabhan from Bangalore: “Today the economy is booming, however, over the next 15-20 years is it feasible to have such a year-on-year growth of the Sensex (and thus the economy)? Historical data over the last 15 years is fine, but going forward I am a little sceptical. What makes us say that the markets will give a 15% year-on-year return over the next 20 years?"