Here’s what to expect from short- to medium-term equity investing
Source: Live Mint
Equity as an asset class is undeniably volatile and cyclical. Long-term investments in equity typically help minimize these risks and harness the power of compounding. But what if you don’t have the luxury of a long-term horizon or the patience to ride out market swings? Can equity still be a viable option for short- to medium-term investors?
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To explore this, let’s analyse the performance of the Nifty 500 TRI, which tracks the top 500 companies by market capitalization, over the past 20 years (from 1 January 2005 to 31 December 2024). We examined how often the index generated returns of less than or equal to 0% (negative or zero returns) versus returns greater than or equal to 10% (fixed income/ inflation-beating returns) across 1, 2, 3, and 5-year rolling periods.
Short term (1-2 years):
Over a one-year and two-year rolling period, the Nifty 500 TRI generated negative returns (≤0%) only 13-18% of the time, while it delivered positive returns 82-87% of the time. In fact, it generated returns greater than or equal to 10% (inflation-beating) in 60-65% of the time.
Medium term (3-5 years):
Looking at three-year and five-year rolling returns, the index generated negative returns only 1-5% of the time, while positive returns were seen 95-99% of the time. The index also provided inflation-beating returns (≥10%) 72-76% of the time.
Key takeaways
Frequent positive returns: In the short and medium-term, the equity index often delivered positive returns, highlighting that equity is a viable option even if you don’t have a long-term horizon.
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Strategic entry: To minimize risks and optimize returns, it is advisable to invest during periods when valuations are reasonable, or below their long-term averages. A three- to five-year investment horizon works well in this context.
Diversification is key: Opting for diversified mutual funds (whether active or passive) rather than picking individual stocks is crucial to managing risk effectively.
Investing strategy – Timing vs predicting
While predicting market movements is virtually impossible, investors can still time their investments during market corrections. Historically, equity markets have experienced corrections of 10-20% and entered time corrections every few years, presenting buying opportunities.
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However, it’s important to note that equity markets are inherently unpredictable. While managing future returns is difficult, managing your risks is entirely within your control. To unlock the potential of compounding and navigate market volatility, maintaining a long-term investment horizon of beyond 5 years remains the most effective strategy.
In summary
Regardless of short-, medium- or long-term if you are investing lump sum amounts, keep in mind to invest during price or time correction periods when valuations turn reasonable or cheap to minimize your risk and optimize on your returns.
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Currently, due to weak earnings, lower GDP growth, and aggressive foreign institutional investor (FII) selling, equity markets are undergoing a price and time correction, presenting an opportunity for investors to enter at more attractive valuations. While the market may remain sluggish in 2025, making it difficult to predict its bottom or the duration of the weakness, spreading out investments and buying on dips can help manage this uncertainty.
Rushabh Desai is founder of Rupee With Rushabh Investment Services.
