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."
