Retail investors got too little joy from the Sensex hitting a peak

On 21 June, the BSE Sensex, India’s most popular stock market index, closed at an all-time high of 63,523.15 points. The Sensex data available in public domain starts from 3 April 1979 onwards, when it had closed at 124.15 points. So, over a period of more than 44 years, the Sensex has gone up by more than 500 times. This works out to a return of a little over 15% per year.

Now what does this mean? If anyone had stayed invested in stocks that constituted the Sensex over the past 44 years and a little more, they would have ended up earning a return of more than 15% annually. There are a couple of disclaimers here. First, the stocks that make up the index have constantly been changed over the years. So, investors would have had to change investments accordingly. Second, there would be a cost involved in doing so. Hence, the actual returns would be lower than 15% per year. Third, it wasn’t very easy to buy and sell stocks across large parts of India up until the late 1990s to early 2000s, and that would have further lessened overall returns.

Even with these disclaimers, however, anyone who stayed invested in Sensex stocks for the past 44 years would have accumulated a tremendous amount of wealth.

Now there is one more disclaimer that needs to be made. The period between 1979 and now needs to be divided into two parts: one of April 1979 to September 1994 and another from September 1994 to now.

On 12 September 1994, the BSE Sensex reached its then all-time high of 4,630.54 points. This was a time when a ‘vanishing companies’ scam was on. Promoters would launch initial public offerings, collect money and vanish. The per-year return between April 1979 and September 1994 was more than 26% per year. Since then, the returns have come down considerably.

The per-year return from the high of 12 September 1994 to the high of 21 June works out to 9.5% per year. The first problem with this calculation is that it’s a point-to-point return from one high to another. Second, it doesn’t take dividends given by companies into account. Even with these problems, the calculation shows us the importance of timing investments in the stock market.

Also, most of us who invest in stocks, directly and indirectly, haven’t been investing for 44 years. So, the argument that fund managers tend to make when they say that the Sensex has given a return of 17-19% per year since 1979 doesn’t really apply to most of us. The Sensex return since the mid 1990s has been considerably lower.

One way to correct for problems in the above calculation is to look at the returns generated by the Nifty Total Returns Index (TRI). The Nifty TRI Index also takes into account dividends given by companies, apart from the price movements of their stocks. The data for this index is available starting from 30 June 1999. The per year return in this case works out to around 13.7% per year. This is a very good rate of return, though lower than the 17-19% return story sold by fund managers.

But have these returns benefitted retail investors? The answer is no, and there are multiple data points that show this. As of May, the total number of demat accounts in the country stood at 118.2 million. Most of these accounts were opened only after 2019. India’s count of demat accounts as of December 2019 stood at 39.4 million.

A demat account is required to buy and sell stocks. Given that a bulk of these accounts have been opened only since 2020, what it means is that most retail investors haven’t benefitted from the good long-term returns generated by the Indian stock market.

Further, 48.8 million Indian demat accounts, a little over two-fifths of all such in existence, were opened in 2020-21 and 2021-22, when stock valuations were very high. The price-to- earnings (PE) ratio of the stocks that make up the 30-share BSE Sensex stood at 28.1 in 2020-21 and 29.5 in 2021-22, which was the highest since 1998-99, the year since when this PE-ratio data is publicly available. Clearly, many retail investors bought stocks only after their prices had rallied quite a bit.

There is other data that bears this out. Take the period between 2009-10 and 2014-15, when the PE ratio of Sensex stocks was largely under 20, implying stocks were reasonably priced given their earnings. During this period, our domestic institutional investors, which mostly buy stocks with money collected from retail investors through mutual funds and insurance schemes, were largely selling equity. In the same period, foreign institutional investors were buying and they benefitted in the years that followed as prices rose.

Finally, let’s look at the much-haloed mutual fund investor. Data shows that in 2022-23, more than half these units were redeemed within a year of investment. Further, only 3.1% of the units were redeemed five years after they had been bought. Evidently, most retail investment in stocks, whether it’s direct or indirect, is not for the long-term.

While the Indian stock market has done well over the years, Indian retail investors haven’t benefitted because such investors start buying only after stock prices have rallied quite a bit and then sell out much too quickly.

Vivek Kaul is the author of ‘Bad Money’.