For a horizon of seven years or more, the probability of making a negative return is zero. Volatility of returns reduces significantly and 92% of the times your equity investments would have earned more than your pre-tax fixed deposit return.
How many of us have lost money in the stock markets? Safe to say many of us have. And once burnt, we have sworn to stay away from the fire. Ever wondered how the others managed to make money then? Well, turns out they were simply patient.
Data show that 68% of equity mutual fund investors in India exit even before completing two years. In contrast, 49% of fixed deposit investors opt for a holding period of more than three years. Stark behavioural difference!
Investors sit on bank deposits
We patiently sit on our bank deposits for years, whether or not we make real returns (returns post inflation and tax), but run out of the inflation beating equity markets at the first sign of distress, which more often than not, given the nature of the asset class, is only temporary.
Anyway, we are here to tell you that being patient is the key to successful equity investing. Historically, as investment horizon increased, both volatility of Sensex returns and probability of loss decreases. For a horizon of seven years or more, the probability of making a negative return is zero. Volatility of returns reduces significantly and 92% of the times your equity investments would have earned more than your pre-tax fixed deposit return.
Stay invested for long in equity
And why does this happen? Emotions lead to short-term volatility as investors move in and out of the markets reacting to supposedly positive and negative bits of news, but over the long-term markets reflect economic fundamentals. By staying invested for a longer tenure, an investor can earn close to average returns. So next time the markets are shaky, you know what to do. Stay put.
When you divide and diversify your portfolio among various imperfectly correlated asset classes instead of concentrating investments in a single asset class, it helps to lessen the effects of market volatility, manage risk and provide the potential to maximise overall returns. How it manages to do this is because historically when one asset type has average or poor returns; the other usually does well. So there will be periods when equity markets will have a brilliant run, periods when only bonds will be dependable, and periods when gold will shine the brightest, and these periods will not typically overlap.
But don’t just take our word for it. Let’s dig into the asset class returns history in India.
The hybrid multi asset mutual fund is one such category that employs an asset allocation strategy for investors with moderately high risk appetite. True multi asset funds enable investors to enjoy returns and minimise downside risk from the debt and gold allocations, while the timely and measured equity allocations provide a boost of higher returns.
Therefore, investors end up with returns higher than the assured (as they are not subject to market risks) fixed deposits over long time periods while they take on some calculated risks. So it is time you shrug off your fixed deposits which have been a losing proposition to make way for multi asset allocation.
(The writer is senior fund manager, Quantum Asset Management)