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Should You Invest In Equities For Just One Year Horizon?

This question begets another one - why not? If one goes by AMFI data, nearly 26% of equity investments done through mutual funds route get redeemed within 1 year.

 Pros I can think of investing in equity mutual fund for at least 1 year:

  • You can still find solace in the fact that your gains (or losses) will be classified by income tax department as long term once you cross 365 days of holding. Other than psychological boost of being classified as a long termer, your tax rate will be lower than most of other income sources
  • There is slightly more than 40 percent chance of securing high returns of above 20%. Contrast this with 10 year holding period – probability of securing 20% annualised ROI is just about 18 percent
  • Not to forget, the highest annual performance delivered by Nifty 500 TRI stands well above 100% while for 10 years, it is about 25% annualized. Investing with one year horizon may get you bragging rights for landing with extraordinary returns

 

And then, let's not forget the darker side, which are:

 

  •       Some will be of the opinion that investing for just 1 year in equities is quite close to gambling. Yes, there is a pretty nice chance of securing high returns, but there is also nearly 22% probability of losing a large part of your capital. The worst case scenario if we go by history: nearly 60% loss in a year
  • There is no margin of error which extended period of holding of say 10 years provide in case of a badly timed bet. For example, probability of securing returns below 8% is just nearly 4 percent with 10 year horizon, while with one year horizon, there is nearly 40 percent chance of securing returns below 8%. With one year investment horizon, one has to be very sure that market will has only one way to go - up

 

Notwithstanding the gambling part, one can still do it. If (and a very big “if” at that) I have to go for this, I will do it with a stringent stop loss and certain minimum time horizon mindset. I will review the investments every quarter, and if the market value of investments fall 10%, I would quickly pull out my money, take the hit and try my luck another day. On the contrary, if market gains cross 20% within a year, I also won't mind pulling out some bit of gains asap!!!

 

Statutory Disclaimer: Don’t treat this as investment advice. Apply your own judgement!!!

PS: All returns data are basis Nifty 500 Total Returns Index (TRI), rolling basis. Actual returns of investing in a Nifty 500 Index tracker maybe lower depending upon tracking error.

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