If you’ve been exploring investment opportunities, you must have heard this advice: Invest in equities for the long term. This statement is popular among seasoned investors and financial experts.
But what exactly does “long term” mean? Is it three to five years, or should it be more like 10-15 years? Let’s dive into this topic and understand what “long-term” refers to when it comes to equity investments.
Defining the Long-Term in Equity Investing
In equity mutual funds, the term “long-term” is more than just a timeframe—it’s a strategy. The magic of compounding, where your money grows exponentially, happens best when you stay invested longer. However, there’s often confusion about what period qualifies as long-term.
To help clarify this, let’s look at two important criteria to define a long-term investment horizon:
- No loss of capital
- High probability of good returns
Analysing NIFTY 50 Data
There has never been a case where the NIFTY 50 returns were negative for more than seven years. That means the investors who held their investments for at least seven years did not lose money.
For any investment horizon of seven years or more, the probability of earning returns higher than 10% exceeded 80%.
This analysis concludes that a seven-year time horizon can be considered the magic number for defining the long term in equity investments.
Why is Seven Years the Magic Number?
Based on the historical data, seven years is a crucial threshold. Here’s why:
There has never been a seven-year window where investors in the NIFTY 50 index faced negative returns. This indicates that the stock market has shown resilience and recovery over seven years.
The probability of earning more than 10% returns for seven years was consistently above 80%. Seven years is a great option for long-term equity investing.
Let’s look at two key takeaways for investors based on these findings.
Takeaway 1: The Longer You Stay Invested, the Better Your Chances
One of the most important lessons learnt is that the longer you stay invested, the better your chances of earning strong returns. For example:
The returns of the NIFTY 50 index varied widely over a one-year investment period. The index recorded a loss of over 55% in the worst-cases scenario. That shows how volatile the market can be in the short term.
The probability of earning positive returns improves over a three-year period, but there is still a risk of loss.
The risk of negative returns drops significantly over a seven-year period and beyond. As the investment period extends, the chances of earning a 10% return or more increase.
That means you are investing in a long term equity fund. You should aim to stay invested for at least seven years. The longer you hold, the greater your probability of enjoying the benefits of compounding and growth.
Takeaway 2: Avoid Equities for Short-Term Goals
Equities are known for their volatility, especially in the short term. If you plan to invest for a short duration, say one to three years, you might want to reconsider investing in an equity mutual fund. Here’s why:
The NIFTY 50 index has shown that the market can experience sharp declines in short-term periods (less than three years). For instance, in a one-year window, the lowest return recorded was a loss of 55.29%.
This kind of volatility can be risky for investors who need their money quickly. If you have short-term financial goals, it’s better to consider safer investment options like debt funds or hybrid funds, which are less impacted by market fluctuations.
An SIP calculator can be helpful for those considering a short-term investment in equities. The calculator estimates the potential returns based on different investment durations, helping you plan better.
The Role of SIPs in Long-Term Equity Investing
A Systematic Investment Plan (SIP) can be a smart way to invest in the stock market, especially for long-term goals. You invest a fixed amount regularly in an SIP. It helps you average your investment cost over time. This method reduces the risk of investing a large amount when the market is high.
Here’s why SIPs are ideal for long-term equity investments:
- Rupee cost averaging
- Discipline
- Power of compounding
Conclusion: Think Long Term for Equity Investments
When it comes to equity mutual funds, a time horizon of seven years or more can be considered long-term. This period offers a high probability of good returns and reduces the risk of capital loss. Due to their volatility, equities may not be the best option for investors with shorter time horizons.
