Podcast : Setting Equity Return Expectations, Demergers & Share Buybacks

What is this podcast about?

In this 5th episode of the Prime Podcast, host Pavithra Jaivant chats with Vidya Bala, co-founder of PrimeInvestor, about the topic of “How Much Returns to Expect from Your Equity Investments.” Before diving into the main topic, they discuss some recent financial news, including the Nifty hitting the 20,000 mark, the series of buybacks hitting the market and Jio Financial’s entry into the AMC business, through a joint venture with BlackRock.

They then delve into the main segment of the podcast where they discuss the intriguing question of return expectations for equity investments. Many investors tend to assume high rates of return without considering the rea growth potential of economy and the companies. And this leads to their falling short of their goal. Vidya shares some insights on how to set reasonable return expectations.

The first approach is to use the FD returns as a benchmark. The expectation is that equity investments should deliver at least three to four percentage points higher returns than FDs, and explains the logic behind this.

The second method involves incorporating the Equity Risk Premium (ERP). ERP represents the excess return investors expect from equities compared to risk-free investments like government bonds. It can vary depending on market sentiment and economic conditions. In bear markets with low risk appetite, ERP tends to be higher, whereas in bull markets, it may be lower.

Vidya advises against basing return expectations solely on past performance, as it doesn’t guarantee future results. Instead, it’s crucial to consider macroeconomic indicators like GDP growth and inflation, as they can impact market behavior and return potential.

She emphasizes that high returns may still be possible with individual stocks, but when considering a portfolio approach, investors should be more conservative. Using historical averages along with macroeconomic indicators can provide a more balanced view of return expectations.

The podcast concludes with a reminder that if one has to tweak the SIP calculator in their excel sheet, it has to be by upping their savings and not the return expectations.

Key segments in the podcast discussion

1. Market Highlights: Nifty’s Dance Around 20,000, Infosys Q1 FY 24, and Share Buybacks (0:00 – 3:37)
2. Demergers in the Spotlight: JIO Financial and ITC’s Hotel Business (3:38 – 7:28)
3. Reliance’s New Venture: Entry into the Asset Management Sector with BlackRock (7:29 – 9:59)
4. The Fed Meeting and Its Impact on Indian 10-Year G-Sec (10:00 – 10:26)
5. Setting Return Expectations for Equity Investments: The Challenge and Importance (11:19 – 19:40)
6. Equity Risk Premium (ERP) and Its Role in Return Expectations (19:41 – 28:36)