Inflation has eaten up half the returns on the Sensex

There’s money in the stocks, say the experts. But the daily pyrotechnics of the Sensex should not blind you to one big downer: inflation. In 2010-11, the Sensex posted 21% returns. Not bad? Adjust for inflation and it’s down too 11.7%. Nothing exciting.

When inflation is chipping away at the real value of your money, paper wealth goes up in smoke faster than ever.

Rising inflation in 2010-11 has not only seriously diluted returns on the Sensex, it has also negatively impacted an already lopsided performance of the 30 individual Sensex stocks. This is particularly disappointing compared with the far healthier performance at both the index and individual stock levels in 2009-10 on account of a combination of lower inflation and recovery from a recessionary environment.

An average inflation rate of 9.5% in 2010-11 cut the real return on the Sensex to half. In other words, if an investor put Rs 100 into equities during the year, the average return would seem to be Rs 21.20. But that would be wrong. Given the rise in prices, the actual income gain would be Rs 11.70 only. This compares with a 32.7% real return in 2009-10, explained by a positive base effect (lower Sensex levels in the year before) and an inflation rate of 3.9%.

The impact of inflation does not end here. Individual Sensex stocks had a skewed performance to start with in 2010-11, with just over half of them posting positive nominal returns in 2010-11 in comparison with a figure of over 80 percent in 2009-10. The figure falls further to a disappointing 40 percent posting positive real returns in 2010-11.

Stocks like Bhel, Hindustan Unilever, Maruti Suzuki, Tata Power and Wipro felt the bite of inflation the most. Nominal returns on these stocks were less than the rate of inflation, as a result of which investors actually lost money by betting on these stocks over the one-year period.

However, these are not the overall worst performing stocks. Some like Sterlite, JP Associates and Reliance Industries showed negative returns from the previous year even in nominal terms. On the other hand, there are some like Tata Motors, Hindalco and Bajaj Auto that showed a stellar performance despite high inflation.

But money isn’t everything right? Want to know about a new happiness index? Click here