Let us evaluate SIP returns of Nifty 50 TRI over different time frames starting from July ’99
1 Year Time Frame?
25% of the time Equity SIP made negative returns over a 1-year time frame.
View: 1 Yr is too short a time frame & definitely not suitable for Equity SIP investing.
3-Year Time Frame?
Occurrences of negative returns reduced from 25% to 11%. While this is an improvement over 1 Yr, negative returns for 11% of the time are still a concern.
View: 3 Year Time Frame is also not suitable for Equity SIP investing.
5 years Time Frame ?
Lower odds of negative returns (0.5%)
Improved odds of better returns – 8 out of 10 times the portfolio earned returns >10%.
10% odds of mediocre returns (0-7%)
View: 5-yr works reasonably well most of the time. But there is a 10% chance of mediocre returns.
7 years Time Frame ?
No occurrences of a negative return
Lower occurrence of mediocre returns – only 3% of the time the portfolio earned <7% returns
Improved odds of better returns – 78% of the time made >10% returns
Invest with a time frame of at least 7 years plus coz Historically a 7+ year time frame helps you minimize your odds of negative returns (no occurrences in the last 22+ years) and increases your odds of better returns (>10% CAGR).
But why do the returns improve with time?Longer Time Frames allow enough time for recovery from large market falls.While 10-20% falls are common & markets recover quickly, the larger falls (>30%) usually take around 1-3 years to recover.
Long Term 7/8/9/10 Years SIP investors benefit from market falls and recoveries as they accumulate more units at lower prices and when the market recovers the extra units accumulated also participate in the upside, thereby enhancing overall returns.