What is the Average Return of the Stock Market?
The core maxim of investment is to set realistic expectations regarding returns, so you can plan your goals and achieve them. A simpler way to understand the importance of assuming practical returns on investment is through an example.
Suppose you are hoping to buy a brand-new car and need to save ₹10 lakhs in 5 years. If you invest in stocks expecting a 20% return per year, the monthly investment will be around ₹10,000 every month. However, if the actual rate of average return is only 12%, you will miss your goal by roughly ₹2 lakhs.
Therefore every successful investment strategy begins with gaining a fundamental understanding of the market and using that knowledge to set realistic expectations of returns. So, you can start with the question — what is the average return of the stock market in India?
What is the Average Stock Market Return?
The term refers to historical returns generated by the stock market over a defined period of time. For example, according to a 2017 Crisil report, the average annual return yielded by a diversified equity portfolio has been at 18% CAGR over the last 20 years.
However, you must keep in mind that the 18% rate of return is reduced by inflation, resulting in decreased purchasing power. This is what makes equity investments more suitable for long-term growth, so you will not have to worry about any major fluctuation in the market taking a hit on your savings. It is advisable to stay invested for at least five years and preferably longer, so you can start seeing stable returns with time.
Factors Affecting Stock Market Returns
The stock market is sensitive to a variety of climatic factors, such as:
- The internal functioning of a company or corporation
- A sudden increase in demand among investors
- Changes in socio political or economic circumstances
- Political events, trade wars, natural calamities, etc.
What Do Average Returns Mean for Investors?
There is a meaningful difference between the average stock market return over 10 years and those over one year, which is why this should not be your only determinant for whether you’ll invest in a particular stock. Annual returns are likely to be higher and sometimes lower, depending on the stock as well as the timing.
Knowing the average rate of returns is useful for keeping your finger on the market’s pulse while setting a realistic base for your expectations. It also enables you to plan your financial goals accordingly and figure out what to expect from your stock investment.
What to Expect from Stock Market Returns?
It is needless to say that the market is volatile and there are no guarantees, but the average rate of return is a useful parameter for setting expectations. A well-known rule of thumb among smart investors is that the higher a stock’s recent returns, the lower its returns in the future, and the other way around. Of course, no rule is without exception, so it’s better to gain a deeper understanding of the market before you begin your investment journey.
If you want to become a productive investor, you need to set the tone with a pragmatic approach. Keeping your expectations grounded in reality will help you form a tighter investment strategy that actually works, rather than leading you to disappointment. Make sure to do your research, invest with patience, and strive for a diversified portfolio that balances risk and returns.
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Frequently Asked Questions
The 2017 CRISIL report claims that the average annual return generated by a diversified equity portfolio has been 18% CAGR in the last 20 years.
You can start by opening a Demat account and linking it with a pre-existing bank account that will enable smooth transactions. Log on to your Demat account and choose the stock you wish to invest in. Make sure your linked bank account has sufficient funds to carry out the purchase. Once you select the stock and the number of units, your purchase order will be processed. Upon completion, you will receive an electronic format of the shares in your Demat account.
Inflation affects the purchasing power of any given currency, which thereby reduces the value of a stock. The greater the rate of inflation, the lower the equity valuation. Returns that are calculated after adjusting for inflation are known as Real Returns.
Here are some things you should do while picking out the right stock:
- Figure out your investment objectives as well as risk appetite
- Find an industry, domain, or company you are interested in
- Research about the company and its competitive advantage
- Evaluate the stock’s current selling price and decide on a fair price