Keep equity market return expectations low

Equity Returns in India Over the Past 5-10 Years have been good. Especially for those who invested from 2020 onwards. It's helpful to benchmark against recent performance. Over the past 6 years (roughly 2020 March-2026 March), Indian large-cap indices like the Nifty 50 delivered strong compounded annual growth rates (CAGR) around 15-20%, while mid-caps and small-caps outperformed dramatically with CAGRs exceeding 30-40% in some segments.

For the past 10 years (2016-2026), the Nifty 50 has averaged about 13% CAGR, aligning with its long-term historical norm, but this period benefited from post-COVID recovery, low interest rates, and robust economic growth averaging 7-8% GDP annually.

However, 2025 marked a sharp slowdown, with the MSCI India Index returning only about 2.2% in USD terms, its worst relative performance in three decades compared to Asian and emerging market peers.

Why equity returns may be lower in the next 5-10 years

Several structural and cyclical factors suggest that Indian equity returns could moderate to single-digit or low double-digit CAGRs (e.g., 8-12%) over the next 5-10 years, compared to the 13-20%+ seen recently. This isn't a prediction of doom but a reflection of mean reversion, where exceptional past gains often lead to periods of consolidation. Key reasons include - elevated Valuations as a Drag on Future Returns, much lower inflation, and geopolitical risks. The Nifty 50 trades at around 21x forward price-to-earnings (P/E) for FY26 estimates, which is at the higher end of its 10-year range (22-28x).

However, the last 18 months have seen some moderation of prices and the recent month (Mar 2026) has seen some drawdown making the markets look attractive.

Corporate earnings growth is decelerating, with MSCI India estimates for FY26 at just 10%, down from the prior years.

This stems from muted domestic consumption, disappointing quarterly results (e.g., five quarters of depressed earnings through 2025), and GDP growth projections dipping to 6.4% for FY25—the slowest in four years. The Trump War is not helping anyone too!

Without deeper structural reforms (e.g., judicial, police, or labor changes), sustained high growth may remain elusive.The Indian rupee weakened by over 5% against the USD in 2025, eroding dollar-denominated returns for global investors. This, combined with heavy foreign institutional investor (FII) outflows , has pressured markets. In the past decade, a stable or appreciating rupee supported returns.

Mid- and small-caps exploded with 400%+ gains over the past 5 years, far outpacing large-caps, but historical data shows this leads to extended consolidation periods to align with long-term averages (around 13% for large-caps). India's equity market has experienced "lost decades" before—e.g., flat to negative returns from 1992-2003 and 2008-2013—where even 10-year holding periods yielded low single-digits after dividends.

The past 20 years delivered less than the expected 7% real return (after inflation) in some stretches due to high valuations and restrictive policies.

India lacks exposure to high-growth themes like AI, which boosted other markets (e.g., South Korea's KOSPI up 76% in 2025).

Broader risks include US interest rate hikes, geopolitical tensions, and potential global slowdowns, which could trigger capital flight.

Tempering expectations avoids disappointment and encourages realistic portfolio planning. While India's long-term story remains compelling—driven by demographics, and potential 6-7% GDP growth—high starting points mean returns could underperform historical highs.

Diversifying into fixed income or global equities might help mitigate this, but for pure Indian equities, aiming for 8-12% CAGR aligns better with adjusted forecasts than hoping for a repeat of the past decade's boom.