Historical returns on Sensex since 1979

In this article I am analyzing Historical Returns generated by Sensex since its inception and logical conclusion derived on basis of the facts and figures.

In one of the earlier post FinWin recommended investment into Index ETF mentioning that one doesn't need to invest time, follow or track the underlying constituent  for performance if a person has long term investment horizon i.e. 10+ years. Also in articles on Financial Independence, I have mentioned about 'Power of Compounding' where calculations are based on 10% CAGR effect over long period of time. Having said that FinWin has recommended investment option as equities to get 10% or more CAGR returns. 

The base year for sensex was 1978-79 at base index value of 100 which has now grown to 17000+ in 30.52 years since then growing at 18.36% CAGR .which is quite exceptional returns. The article highlight three key indicators namely 'Probability of Loss' , 'Average returns' and 'Deviation from Average' across different time slices of 1 yr, 3 yrs, 5 yrs, 7 yrs, 12 yrs, 15 yrs, 20 yrs and 30.52 years.
As it is quite evident from the data 'Probability of Loss' in short term is 50% to 9% with 'Average Return' ranging from 18% to 11% and 'Deviation from Average' from 30% to 7.5% points for investment time frame of 1 year to 7 year period. However with time horizon of investment more than 10 year to 30 years you will see that 'Probability of Loss' is NIL with returns averaging from 10% to 20% and deviation from average of around 4.75% to 2.5%.

Thus based on the facts and figures as presented below the conclusion derived is that investment in Index in short to medium term provides return  of   11%-18% CAGR with deviation of around +/-7 to 30 with Probability of capital erosion of around 9%-50% hence proving very volatile with risk to the capital invested. But if a person is invested over long term i.e. 10+ years than 'Probability of Loss' or 'Capital Erosion' is virtually NIL providing a return of 10% - 20% CAGR with average deviation of +/- 2 to 5 points.

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Indices : BSE Sensex - The Barometer of Indian Capital Markets

SENSEX, first compiled in 1986, was calculated on a "Market Capitalization-Weighted" methodology of 30 component stocks representing large, well-established and financially sound companies across key sectors. The base year of SENSEX was taken as 1978-79. 

SENSEX today is widely reported in both domestic and international markets through print as well as electronic media. It is scientifically designed and is based on globally accepted construction and review methodology. Since September 1, 2003, SENSEX is being calculated on a free-float market capitalization methodology. The "free-float market capitalization-weighted" methodology is a widely followed index construction methodology on which majority of global equity indices are based; all major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the free-float methodology.

The growth of the equity market in India has been phenomenal in the present decade. Right from early nineties, the stock market witnessed heightened activity in terms of various bull and bear runs. One can identify the booms and busts of the Indian equity market through SENSEX. As the oldest index in the country, it provides the time series data over a fairly long period of time (from 1979 onwards). No wonder, the SENSEX has become one of the most prominent brands in the country.

Current list of sensex constituents is as below:

source: www.bseindia.com