Skip to main content

Long-term investment = zero loss

 

Equity has an image of being a very risky investment vehicle that somehow works in the long term. We looked at past data and found startling results. Your chances of incurring losses goes down as your holding period goes up. If you held investment in the Sensex for at least 14 years, beginning any date in the past 30 years, you've not lost any money.

Numbers for long term

We ran a simple, but arduous test. We took Sensex figures (closing end-of-day figures) since its inception on 3 April 1979. We assumed you invested in it (taking the Sensex closing figures as the net asset values, or NAVs, of a mutual fund scheme) for a period of one year on any day between 3 April 1979 and till as recent as possible. At the end, we took an account of the number of one-year time periods where you made money and the number of one-year time periods where you lose money. Next, we repeated the same exercise but kept on increasing our holding period by a year till 30 years. So on the lower end, while the holding period is one-year, on the farther end we have also assumed that you invest for a time period of 30 years, anytime between April 1979 and till as recent as possible. What we found was:

• The lesser your time horizon, the more are your chances of making losses. For instance, if you had invested for one year, you would have made losses 2,026 times out of total of 6,784 one-year time periods between 1979 and till as recent as possible or 30% of the times

• On the other hand, as you increase your time horizon, your chances of making losses go down. For instance, investing for seven years or 11 years would have dropped your chances of making losses to 7% and 4%, respectively. In other words, your chances of making money go up to 93% and 96%, respectively

• Here's the clincher: if you had invested in Sensex, India's oldest stock market index, for at least 14 years, in any 14-year period—since its inception in 1979 till as recent as possible—you would not have lost any money. Out of a total of 4,189 14-year time periods since Sensex's inception, you would have made money in all instances

• Although the average return between investing in any 14-year time period, right up to, say, 20-year time periods swings between 13.78% and 14.75% on average, the minimum return that you earn goes up as your investment horizon goes up

• If you invest for 30 years, the minimum you would have earned was 16% compared with a maximum of 18.22%

Sticking for long…

Guaranteed returns over a 14-year time period sounds good on paper, but do we have the patience to stick around for 14 years? As per March 2010-end data available with the Association of Mutual Funds of India (Amfi), 62.57% of investor folios stuck around for at least two years. Amfi does not give a break-up of the time periods higher than two years for investments in mutual funds. Though the latest figure has gone up from 50.51% at the end of September 2009 and 46.44% at the end of March 2009. Strangely, 4.54% of the total equity assets from retail investors go out within a month. This has doubled since September 2009.

Though fund managers are finding it hard to convince investors to stick around for as low as, even, five years, sticking around for the long term actually makes sense because the longer you are invested the better would be your returns.

Chandresh Nigam, head (investments), Axis Asset Management Co. Ltd says: "While people may not be perceptive about long term, they can at least start planning for retirement if they're 30 years or less." In other words, says Nigam, investors in their 30s or even less can put away a small portion of their corpus for retirement, which would be around 20-30 years away.

Nigam feels the Indian economy is poised to grow well over the next 15-20 years as companies are expected to earn 12-15% per annum, on average. "Twenty years back, we had to wait endlessly for a telephone connection and had black and white television sets. Today, we have colour television sets, mobile phones and it's relatively easier to go abroad than what it was, say, 20 years back," says
Nilesh Shah, deputy chief executive officer, ICICI Prudential Asset Management Co. Ltd, as examples of how India has progressed. Shah believes that today India may not have achieved as much as desired but "we have come a long way". There is no reason why, says Shah, we can't go further.

…using the index route

To put away a portion of your corpus for very long time periods requires conviction in equity scrips or funds that you have invested in. However, spotting the right fund that you know you can stick around for 14-15 years or more is not an easy task. "The number of fund managers that have been around in the Indian MF industry for such long periods are very few. You can count them on your finger tips. When fund managers shift, it becomes tough to invest your money with them for such long periods," says
Krishnamurthy Vijayan, CEO, IDBI Asset Management Co. Ltd. Vijayan believes that passively managed funds, such as index funds, are the best way to invest your money for long periods. "Although in the past, active fund managers have outperformed the broad indices, the rate of success has not been very huge. But if you don't want to run the risk of a fund manager managing your money, you can diversify in index funds," adds Nigam. Pune-based financial planner, Veer Sardesai says: "To further reduce volatility, invest through a systematic investment plan."

 

Popular posts from this blog

Gold: What Can Trigger the Inevitable?

A stronger dollar or rising interest rates could derail the epic yellow metal mania   Before you sell that last piece of jewellery, keep in mind that the gold price will not go up indefinitely. There are number of reasons why it might crash. If you're over weighted in gold or commodities, the warning is the same: A stronger dollar, strengthening US economy or rising interest rates could derail the epic yellow metal mania. Who knows? Congress could even reach an agreement to clear up its balance sheet and pay down its debt. What are the chances of any of this happening? It's beyond the limits of my minuscule, clouded crystal ball, which is about the size of a pin-head.   Nevertheless, you should prepare your portfolio for any number of eventualities, which can be easily accomplished with exchange-traded funds. Gold is troublesome in my book because it really isn't an investment. It's a reserve currency of sorts that's heavily traded by institutional investor...

What is Statutory Liquidity Ratio - SLR?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 What is Statutory Liquidity Ratio - SLR ?   Last week, the RBI cut statutory liquidity ratio ( SLR ) by half a percentage point to 22.5%, effective June 14. By this, the central bank intends to release additional money into the banking system. SLR is the amount of funds that every commercial bank should have either through its holdings in government approved bonds and securities, gold or a combination of these assets. This is another way of ensuring enough liquidity for each bank before they lend to customers. By reducing SLR, the RBI released another half a percentage point of commercial banks' total deposits (in banking parlance, total demand and time liabilities that include FDs, savings and current accounts) to be free ...

7 Things You Should Look for in a Financial Planner

Recently, a new breed of professionals has emerged who are making financial plans for everyone and are not restricting themselves to investment planning. A financial plan includes planning for your taxes, retirement, kids' education and marriage, buying a home, estate planning or any other goals you may have. This new breed of professionals, known as financial planners, writes a plan for you with all your goals specifically laid down and then provides you with a road map on how to achieve these goals. They always give you a holistic account of all your finances, taking into account all your assets and liabilities, besides taking care of all the risks associated with you and your family and also the assets owned by you. These financial planners will first collect all the data related to your finances and the goals you have for future. These goals may be anything ranging from buying a home, to planning for your child's education to going on a vacation. After this exercise of d...

Market Pre-open session - How It works and Its benefits

   With an intention to reduce volatility in various scrips at the opening of the markets, and to arrive at the ideal opening price of a scrip, the exchanges have introduced a call auction process in the pre-open session from October 18.    The pre-open session is a new innovation to arrive at the ideal opening price of a scrip for the current trading session. The session intends to reduce volatility in the beginning of a day. Under this new arrangement, an exchange will collect orders for the first few minutes of this session. On the basis of orders received, it will arrive at the opening price and match the tradable orders to that price. The remaining orders will be moved to the normal trading session.    The call auction process will be initially introduced for scrips forming part of Nifty and Sensex, and trading in other scrips and F&O contracts will only begin at 9:15 am when normal market trading begins. Orders not will get traded during the order entry period in the pre-...

ASBA Option for Initial Public Offer (IPO)

IPO (initial public offering) applicants, particularly the unsuccessful ones, often have to face a double whammy of sorts. On the one hand they fail to get allotment of shares and on the other, they lose out on the interest during the period their money is locked —that is, if they have opted for the traditional method of issuing cheques for depositing the application money. However, if they choose the ASBA (Application Supported by Blocked Amount) facility, they can circumvent this problem. But do note that you cannot decide to make two applications – one by way of cheque payment and the other through ASBA. If you do so, it could be rejected on the grounds that it constitutes multiple applications. Introduced by Securities and Exchange Board of India ( Sebi ) in 2008, using ASBA has become mandatory for all non-retail investors. Retail investors, though, continue to have the option of choosing between the old and new mechanisms. However, it is in your interest to opt for ASBA. He...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now