83% times equity investment gave over 10% returns: Is 7 years the best minimum holding period for higher returns? Analysis of the rolling returns of NIFTY 50 TRI has given some interesting insights and 7 year period has emerged as the one of the best minimum holding periods where chances of above 10% returns are very high. 15 year has come out as the most rewarding among the different holding periods
It is a well-known fact that the equity market gives you one of the best returns if you remain invested for a long period. But long term is vague. What is the minimum investment period required for investors to have decent chances of getting better returns? Not many know the answer.A report from FundsIndia — Wealth Conversations February 2024 — has an interesting insight: if you had invested in a basket of NIFTY 50 stocks on any day since June 30, 1999, and remained invested for a minimum of 7 years, it would have delivered more than 10% returns 83% of the time, as reflected by the NIFTY 50 TRI.
What is the best minimum period for which one should invest in equities?
Does it mean that when people plan equity investment, they should aim to remain invested at least for 7 years to enhance their chances of double-digit returns and meet medium-term goals?“While in the short run the markets behave like a voting machine and are driven more by sentiments, in the long run, fundamentals almost always take over the sentiments and the stocks start reflecting their true value,” says Raghvendra Nath, MD, Ladderup Wealth Management. “Over extended periods, the equities average out the volatility and therefore the probability of earning superior returns improve. Seven years is not a magic number though. It is generally recommended that when investors are investing in equities, they should only put that portion of their wealth that has to be preserved and grown over a long period.”
83% of the time Indian equities gave more than 10% returns over 7 years
Rolling Returns (Compound Annualised) for Nifty 50 TRI Since Inception, i.e June 1999Source: MFI, FundsIndia Research. As on January 31, 2024. Nifty 50 TRI Inception Date: June 30, 1999.
According to the report, there was a 98% chance your returns would have been at least more than 7% if you had remained invested for 7 years or more. There was not a single instance when the returns were negative in this situation. Hence, it further strengthens the argument that equity investments would need at least 7 years of investment.
What 7 years’ investment period in NIFTY 50 TRI offered in last 23 years
There was not a single instance of negative returnsOn 98% occasions, the annual returns were more than 7%On 83% occasions, the annual returns were more than 10%On 65% occasions, the returns were more than 12%In 36% instances, investors got more than 15% returnsThe average annual return during this period was 15%Maximum annual returns for some investors went up to 30%The minimum annual return was 5%“Investors who invest in equities should choose a time frame of at least 7 years,” says Arun Kumar, VP and Head of Research, FundsIndia. “This helps to increase the odds of reasonable returns and reduce the odds of mediocre/negative returns. In the last 23+ years, 83% of the times Indian equities gave more than 10% returns over 7 years with no instances of negative returns.”15-year period delivers one of the best results in equity investments
According to the report, equities always delivered more than 7% return if the investment period was for 15 years. Does this mean people should aim to remain invested for at least 15 years to enhance their returns for long-term goals, like retirement or child education?Equity markets are known to throw surprises so one needs to factor this in while planning future investments. “While we cannot precisely know if history will repeat, we can broadly say that having a long time frame helps to achieve long-term goals,” says Kumar.
The returns of a long investment period may appear attractive but many investors find it hard to stick to the investment commitment for such a horizon. For such investors, a medium-term approach with an investment period of 10 years may work better.“We believe that if an investor is considering an entry into equities, they should look at it from a longer time horizon. That is to say that although the ideal holding period for an investor in equities had been 5 to 7 years thus far, it would be better if the horizon be extended to 10 years,” says Saket Lakhotia, Senior Executive Director - Wealth, Client Associates.
The longer you stay invested in equities, the better it gets.“If the investment is not aligned with any short- or medium-term investment goals, then a longer investment horizon would be ideal as the chances of earning better returns would be higher,” says Lakhotia.
“Of course,” says Nath, “equities work best for long-term goals like retirement or funding a child's education, as you can quite accurately estimate the fund requirements for the future and then plan your investments more scientifically. Additionally, the likelihood of experiencing negative returns drastically drops from 24% for a 1-year investment period to 0% for periods longer than 7 years.”
Does timing the equity market help in boosting the return?
On 65% and 79% occasions, returns from equities were more than 12% if the investment was for 7 years and 15 years, respectively. Does this mean timing your market entry also plays some role in enhancing the returns or should retail investors stick to the SIP route to avoid timing the market?"The quantum of returns are also dependent on your asset allocation approach. For instance, in the period where equities delivered just 9% over a 15-year period, there may have been many short-term rallies. If the client adjusted his asset allocation appropriately during those intermittent peaks, his returns could have become much better," says Nath.
The role of timing is mostly overemphasised. “If one started timing the markets, they would end up sitting out in most of the bullish periods and thereby miss the opportunity. Investing in high-quality and high-growth businesses is the antidote to mistiming. And the other antidote is spreading your investments. Rarely do we have situations where the entire wealth is invested in a single point in time. In most cases, you keep generating surpluses and investing them in the markets at various points in time. An approach like that takes away the impact of mistiming completely,” adds Nath.
Savvy retail investors may be able to find the right time to enter and exit the market; however, it will become challenging if you have to do it for a very long period. "Timing is crucial when you are ‘betting’ in the markets for shorter periods because investing during bullish times when the valuations are stretched can lead to minimal or even negative returns over shorter time periods. Over the long term, however, stock prices tend to gravitate toward their fundamental values, which helps mitigate the volatility experienced during various phases of the business cycle. Systematic investment plan (SIP) is an effective tool for wealth accumulation over time because it averages out the purchase price by investing at different market phases, thus generating returns during market upturns," says Nath.
Identifying the right time to enter the market may not be an easy task for most retail investors. “Market timing may play a significant role in the overall return, but when it comes to retail investors, it is better to stick to SIPs as it works on the power of compounding, which means that the accumulation of monthly investments compounds to generate exponential returns over a long period of time,” says Lakhotia.
A staggered approach of investment through SIPs makes it less risky and affordable to retail investors. “By investing regularly through an SIP, you are allowing smaller investments to build gradually over time into a large sum with the power of compounding and you also benefit from volatility by accumulating more units during a market fall which participates in subsequent recovery,” says Kumar.
What is the best minimum period for SIPs in equity mutual funds?
When investing through the SIP mode, how should people plan for the minimum investment period because the latest SIP investment would always have a lower investment horizon?“When it comes to your equity SIPs, invest with a time frame of at least 7 years - historically a 7+year time frame helps you minimise your odds of negative returns (no occurrences in the last 23+ years) and increases your odds of better returns (>10% CAGR). If markets experience sharp temporary declines near the end of your 7-year time horizon, then going by history, we have seen that extending the time frame by 1-3 years has led to a significant recovery in returns,” says Kumar.
SIPs are likely to continue for a long period and may run till the period when the goal is due. This means that the last tranches of investments will have much less time to stay invested . What should investors do in this case?
Lakhotia says: “When investments via the SIP route are aligned with a particular goal, then it is recommended to structure the SIP in such a way that it does not coincide directly with the target date or the date when funds are required. Instead, one should aim to make equity investments for a duration of at least 2-3 years prior to the period when the funds are needed. In this way, the investments can be moved to a less volatile asset class, such as short-term debt or liquid-equivalent funds, before the date when the funds are required, thereby providing liquidity and mitigating market risk. However, the final tranche of the equity SIP, which typically constitutes a smaller percentage of the total investment, will get enough time to compound and generate returns. In this way, the overall risk associated with the investment is significantly re
This story originally appeared on: India Times - Author:Faqs of Insurances
