Skip to main content

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.

Comments

Post a Comment

Popular posts from this blog

Lump Sum Equity Investing – The Capital Protection Way Part II

Long ago, here  I posted how I would go about investing a sizable amount in equity index funds. I assumed in this blog that for next 5 years, equity markets will enter their worst phase and deliver poor returns – in fact negative returns of 10% annualized for next 5 years. Such a bad phase would result in equity fund corpus down by nearly 41% in absolute terms. Have the equity markets done that bad historically? Not at all. The worst case 5 year equity markets performance, basis Nifty 500 Index TRI has been in covid times @ minus 1.4% annualized for March 2015 – March 2020 period. Essentially, our assumption of minus 10% annualized ROI for 5 years was way too bad than actual worse case seen. Let us redo the numbers basis some realistic data: -           Actual worst case 5 year CAGR seen:   Minus 1.4% -           Assuming things can go even worse than this sometime in future, we c...
Post a Comment
Read more

War And Equity Investments

Uncertain times are upon us. There is a shadow of war post killing of tourists in Pahalgam. So far, equity markets have not shown any signs of cracking up despite of high expectations of armed conflict with our wayward neighbour. Is it the calm before the storm as far as equity markets are concerned? It is anybody’s guess that if a protracted war does happen, economy will take a hit in near term, which in turn will impact our daily lives, including equity markets. When and how this will happen is again anybody’s guess. Should you take a relook at your equity investments in such a scenario? Nothing wrong in being a little conservative in such times. Here’s what I think can be considered:     -           Scenario I: You have designated INR 100 for equity investments and are fully invested. While you do have money in non equity investments, in case of equity market downturn, YOU WILL NOT PULL MONEY OUT OF SUCH INVESTMENTS AND DEP...
Post a Comment
Read more

Why SIPs Work Only When You Are at It For Significantly Long Time

No, this blog is not about how a SIP  running for long periods (10 years?) lets one weather the market cycles and average your buying cost. Enough has been said about it and that remains. By the way, there’s no standard definition of “LONG PERIOD” as such. It’s left open to investing entity!!! This blog is more towards accumulating capital, as (HIGH) returns really matter only when they are earned on reasonable amount of capital. Even extraordinarily high returns on piddling capital (savings) don’t amount to much in absolute numbers. And it takes time to build up capital if you are doing it gradually, even after taking impact of compounding. Let the numbers come to our help. But first, we need to establish some benchmark to evaluate how long should one run a SIP, alongwith a projected rate of return. Here’s a simple benchmark for SIP duration – my investment should double at the end of SIP period for a particular rate of return. I will consider that duration as “LONG TERM”. ...
Post a Comment
Read more