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Is equity a safe bet as a long-term investment?

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Equity is an asset class which is well-known for its volatile nature and has been embraced and feared the most by investors. More often than not, investors enter into equity market with the mind-set of making substantial returns in a short time. Given that equity has high volatility over short holding periods, it leaves investors believing that equity is a risky investment.

However, the right approach would be to embrace equity for a longer time period, and you will see that equity is not a risky investment. This can be best explained by looking at the data for around 26 equity mutual funds which have stood the test of time and have been there for 25 years or longer. UTI Mastershare Fund, launched in 1986, is the oldest one and has delivered an average 10-year rolling return (with daily shift) of 12.5% per annum (p.a.) between 1997 and 2022. A 10-year rolling return average shows how an investment in the fund would have fared.

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Now, let us take the case of a person investing equally in all the 26 funds in 1997 and holding them for a period of 10 years. The average would have been a return of 16.8% p.a. between 1997 and 2022. The worst-case return for a 10-year period for a person who had invested equally in all 26 funds would have been 9.5% p.a.— a return more than what an investor would have made from fixed deposits.

Now, let us dwell deep into these 26 funds and take a case where an investor picked only one fund and stayed invested for a period of 10 years. The luckiest investor would have made a return of 51% p.a. while the unluckiest investor would have lost 1.9% p.a. In 95% cases, that is, in around 135,600 out of 1 42,500 instances, a 10-year investor would have made more than 6% return which means they would have made more than that from FDs. In 99.4% of the cases, that is, in around 142,400 cases, a 10-year investor would have made positive returns indicating that they did not lose capital.

The above data clearly tells us that equity investing is not risky for a long-term investor. So, in order to achieve your investment goals, you must embrace equity and have a meaningful equity allocation in your portfolio. Furthermore, risks can be reduced by following some basic principles of diversifying and reviewing your portfolio at regular intervals.

Feroze Azeez is deputy CEO, Anand Rathi Wealth

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