In equity investment, how long is long term? We have got the answer for you
By Bhavana Acharya
When you invest in an equity fund, the one sage advice you always get is that the short term is risky and you need to hold your fund for the long term. But how risky is the short term? How long is long term?
To answer that, we checked returns for different time periods, took these returns every single day from March 2007 to March 2017, and then measured how often funds delivered losses on an average.
The past 10 years has seen several market booms and corrections and there is enough data across fund categories to make this analysis realistic.
Here's what we found:
If at any time in the past 10 years, you had invested in an equity fund and held it for one year, there is a one-in-four chance that you suffered losses. This is regardless of whether you held a midcap fund, largecap fund, or diversified fund. The chances of actually losing your capital remain high over one year, two years and three years. Only after that does the risk of loss closes on to zero. The representative indices - the Nifty Freefloat Midcap 100, the Nifty 100 and the Nifty 500 - also show similar trends in delivering losses.
Holding beyond five years almost eliminates the probability of losses. The small probability of loss that you see in the largecap and midcap categories is due to two or three very poor performers that never managed to pick up, skewing the overall average. Barring these few funds, neither equity funds nor the broader market delivered losses beyond a six-year period. So when it comes to equity funds, a 7-8 year period is a good definition of what long term is.
Further, along with loss probability diminishing over years, the ability of funds to generate reasonable returns stays steady. Largecap funds delivered at least 12 per cent returns almost half the time across timeframes. Diversified funds delivered 15 per cent-plus returns about 40 per cent of the time across timeframes while midcap funds generated returns in excess of 20 per cent for around 30 per cent of the time.
Now that you know what long term is, invest with the right timeframe in mind. Do not expect the same returns for all your equity funds. Also, remember that fund selection is very important, because if you happen to invest in a poor performer, holding it even for years will not help.
(Bhavana Acharya is a Mutual Funds Analyst at FundsIndia.com. Views expressed in this column are her own and do not represent those of ETMarkets.com)
When you invest in an equity fund, the one sage advice you always get is that the short term is risky and you need to hold your fund for the long term. But how risky is the short term? How long is long term?
To answer that, we checked returns for different time periods, took these returns every single day from March 2007 to March 2017, and then measured how often funds delivered losses on an average.
The past 10 years has seen several market booms and corrections and there is enough data across fund categories to make this analysis realistic.
Here's what we found:
If at any time in the past 10 years, you had invested in an equity fund and held it for one year, there is a one-in-four chance that you suffered losses. This is regardless of whether you held a midcap fund, largecap fund, or diversified fund. The chances of actually losing your capital remain high over one year, two years and three years. Only after that does the risk of loss closes on to zero. The representative indices - the Nifty Freefloat Midcap 100, the Nifty 100 and the Nifty 500 - also show similar trends in delivering losses.
Holding beyond five years almost eliminates the probability of losses. The small probability of loss that you see in the largecap and midcap categories is due to two or three very poor performers that never managed to pick up, skewing the overall average. Barring these few funds, neither equity funds nor the broader market delivered losses beyond a six-year period. So when it comes to equity funds, a 7-8 year period is a good definition of what long term is.
Further, along with loss probability diminishing over years, the ability of funds to generate reasonable returns stays steady. Largecap funds delivered at least 12 per cent returns almost half the time across timeframes. Diversified funds delivered 15 per cent-plus returns about 40 per cent of the time across timeframes while midcap funds generated returns in excess of 20 per cent for around 30 per cent of the time.
Now that you know what long term is, invest with the right timeframe in mind. Do not expect the same returns for all your equity funds. Also, remember that fund selection is very important, because if you happen to invest in a poor performer, holding it even for years will not help.
(Bhavana Acharya is a Mutual Funds Analyst at FundsIndia.com. Views expressed in this column are her own and do not represent those of ETMarkets.com)
