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Are equity investments safe?

Shashikant Singh
/ Categories: Mindshare, DSIJ News
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Are equity investments safe?

The current volatility in the equity market has made many investors worry if equity investment is safe? It can be if if you remain invested for longer period. In the shorter period, you may see heightened volatility, however, as the investment horizon increases, the volatility declines.

The diagram below clearly highlights the above point. The boxplot shows the return distribution of equity returns over different periods. You can see that in 15-year period, even the lowest return is greater than zero that is in 15-year period equity has never ever generated negative return. For 10-year period also only those returns are negative if somebody would have invested at the high of great 1992 Bull Run and suffered two major crashes. First security scam in 1992 alone and second Ketan Parekh manipulation of stock led to the 2000-01 crash of Indian equity market.

The following box represents the above diagram in table format.

 

Rolling Returns

 

1 Year

3 Year

5 Year

10 Year

15 Year

No. of Observations

8989

8485

7981

6721

5461

Minimum Return

-62.5%

-21.2%

-11.1%

-6.7%

3.8%

Quartile 1 Return

-4.5%

1.6%

2.7%

6.7%

8.3%

Median Return

12.5%

10.8%

11.8%

12.3%

11.3%

Mean Return

18.6%

14.5%

13.9%

12.8%

11.5%

Quartile 3 Return

38.1%

25.4%

24.5%

16.3%

13.9%

Maximum Return

317.3%

84.3%

49.0%

38.7%

22.6%

Stdev

36.0%

17.5%

13.2%

8.3%

4.1%

We have taken Sensex to represent equity returns only for explanatory reasons. Nonetheless, there is a lot of variance within equity returns. If you approach equity investment from a portfolio perspective, you can further improve upon the above results.

Thus, the equity market cannot guarantee you the fixed returns offered by fixed deposits; however, for a long-term investor it comes pretty close, with much higher returns.

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