The duration of long-term investment in the stock market, referred to as "Equity"
In the world of investments, finding the right balance between risk and reward is crucial. For those considering investing in the NIFTY 50, a prominent Indian stock market index, understanding the ideal time horizon is essential.
According to historical data, the generally accepted long-term investment horizon for NIFTY 50 equities is typically 5 to 7 years or more. This duration helps to reduce the impact of market volatility, smooth out short-term fluctuations, and align returns closer to the index’s long-term compounded annual growth rate (CAGR), which has been roughly around 11-12% over extended periods.
The rationale behind this recommendation is supported by the volatility characteristics of the NIFTY 50. Shorter rolling returns (1-3 years) can be highly volatile, even negative at times. However, as the investment horizon is extended to 5 or 7 years, the volatility decreases, bringing returns closer to the steady long-term CAGR.
For instance, historically, a seven-year investment period has shown a high probability (more than 80%) of earning more than 10% returns with the NIFTY 50. In fact, the index has never historically resulted in a loss of money for a seven-year time horizon.
Similarly, for a five-year investment period, the NIFTY 50 has delivered approximately 71.41% of 10%+ returns, while for a three-year period, it has delivered 64.53%. These statistics indicate that the probability of earning 10%+ returns increases as the investment period is elongated.
It's important to note that for a one- to three-year time horizon, equity investments may not be suitable, and investors should consider exploring short-term instruments such as debt and hybrid funds. Conversely, for a twenty-year investment period, the NIFTY 50 has historically delivered 99.79% of 10%+ returns, underscoring the magic of compounding that happens in the long term.
In conclusion, a time horizon of 5 to 7 years or more is generally considered the ideal for long-term investment in the Indian equity market context. This balance between risk and reward allows investors to capitalise on sustained market growth trends documented over decades while minimising the impact of short-term volatility.
Investing in equity funds like the NIFTY 50 requires a long-term perspective, with a duration of 5 to 7 years or more, as this helps minimize the effects of market volatility and align returns with the index's long-term compounded annual growth rate (CAGR). For shorter periods, such as one to three years, it might be more suitable to consider short-term instruments such as debt and hybrid funds.
