Investing, a crucial aspect of financial planning, requires a strategic approach that aligns with individual goals and time frames. Whether it’s equities, debt funds, or other asset classes, having a clear investment horizon is imperative for optimising returns and managing risk effectively.
Investing with a time frame: Importance across asset classes
When it comes to investing, one cannot overlook the significance of having a time frame in mind. This holds true for all asset classes, from fixed deposits to real estate and mutual funds. Consider this: investing in a fixed deposit for a duration shorter than the lock-in period results in penalties and reduced interest earnings. Similarly, real estate investments demand a long-term perspective to mitigate the risk of liquidity challenges.
Equity investments and the long term
It’s a common adage that equity investments are for the long term. But what exactly does “long term” signify?
Contrary to popular belief, the risk in the short run is the same in the long run as well. Market volatility can lead to sudden downturns irrespective of the duration of your investment. However, what distinguishes the long-term is the higher probability of positive returns despite short-term fluctuations.
The power of compounding ensures that over time, investors can potentially achieve returns that surpass inflation rates and market downturns. Historical data suggests that the likelihood of experiencing losses diminishes significantly over periods exceeding 10 years, making it a favourable investment horizon for equities.
For instance, the chances of you making a loss in equity in 1 day is 46%, and over the 10 years is 0%.
| Period | % times returns were negative |
| 1 Day | 46% |
| 1 Month | 38% |
| 6 Months | 35% |
| 1 year | 24% |
| 3 years | 7% |
| 5 years | 0.1% |
| 10 years | 0% |
Based on Nifty50 Index since June 1999. Past performance may not be sustained in the future.
At the same time instances where you made more than 10% returns in 10 years is more than 83% of the times.
| Period | % times returns were more than 10% |
| 1 Day | 0% |
| 1 Month | 6% |
| 6 Months | 40% |
| 1 year | 57% |
| 3 years | 66% |
| 5 years | 73% |
| 10 years | 83% |
Based on Nifty50 Index since June 1999. Past performance may not be sustained in the future.
Crafting your investment strategy
Crafting a robust investment strategy requires careful consideration of both goals and time frames. Whether it’s equity investments aimed at long-term wealth accumulation or debt funds tailored to meet short to medium-term objectives, aligning your investments with the appropriate time frame is paramount.
By understanding the nuances of different asset classes and selecting investment avenues that match your risk tolerance and investment horizon, you can build a diversified portfolio capable of weathering market fluctuations while working towards your financial goals.
In conclusion, while the investment landscape may vary across asset classes, one principle remains constant: the importance of investing with a time frame in mind. Whether you’re embarking on a long-term equity journey or seeking stability through debt funds, strategic planning tailored to your investment horizon is the key to financial success.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
The author of this article, Niranjan Avasthi, is the SVP and Head – Product, Marketing & Digital business at Edelweiss Asset Management Limited (EAML)