{"id":16180,"date":"2023-09-18T15:03:42","date_gmt":"2023-09-18T09:33:42","guid":{"rendered":"https:\/\/zerodha.com\/varsity\/?p=16180"},"modified":"2023-10-07T13:53:26","modified_gmt":"2023-10-07T08:23:26","slug":"the-compounding-effect-is-not-linear","status":"publish","type":"post","link":"https:\/\/zerodha.com\/varsity\/the-compounding-effect-is-not-linear\/","title":{"rendered":"The compounding effect is not linear!"},"content":{"rendered":"

The Nifty 50 Total Returns Index (TRI) delivered a 10.36% CAGR between Mar-08 and Mar-23. \u20b91 lakh invested in Mar-08 would have become \u20b94.4 lakh in the 15 years through Mar-23.<\/span><\/p>\n

Does that mean, at a 10.36% compounded rate, your investment in Nifty 50 would have grown steadily year after year? Meaning, would your INR 1 lakh invested in March 2008 have become \u20b91.64 lahks in March 2013 and \u20b92.68 lahks in March 2018?<\/span><\/p>\n

Not really!<\/span><\/p>\n

In March 2013, your investment would be worth only \u20b91.27 lakh. <\/span>In March 2018, it would be \u20b92.40 lakh.<\/span><\/p>\n

Why this difference? Look at the chart below. The red line is how 10.36% would grow steadily. The blue line is the actual monthly movements of the Nifty 50 TRI over 15 years.<\/span><\/p>\n

\"\"<\/a><\/p>\n

The curve is full of ups and downs. Most movements are below the linear compounding line. So, the returns would have been less than the 10.36% average in most periods. Only a few large positive swings have resulted in the 10.36% CAGR.<\/span><\/p>\n

Why does this happen? Markets are volatile, and that\u2019s the very nature of the markets. Several economic, social, political, natural, and uncertain events influence the market daily. One cannot know the frequency and magnitude of such events. Investors and traders keep adjusting their expectations in response to every event. The result is volatility.<\/span><\/p>\n

What is the way out?<\/span><\/p>\n