Investments in an equity mutual fund via the systematic investment plan (SIP) can reduce the potential risks in the market compared to investing in a lump sum or directly in stocks. However, mutual funds are generally less risky than stock investments. Because of the risks involved, the Security and Exchange Board of India (Sebi) asks fund houses to caution investors with the disclaimer: “Mutual Fund investments are subject to market risks, so read the offer document carefully before investing.” However, despite the risks, more and more people are investing in the stock market for wealth creation. For example, in the April-July 2024 quarter, SIP accounts have increased to 9.34 crore from 8.40 crore in FY2023-24, an increase of around 94 lakh.

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So, if you plan to invest in an equity mutual fund, the following factors are vital to reduce risk:

· Invest through SIP

· Invest for the long-term

But, how long is a long-term? This question can be confusing to new investors. So, here we unpack the term ‘long-term’ to determine what could be the ideal period for positive returns.

So, What Should Be The ‘Long-Term’ To Generate Positive Returns?

SIPs are one of the best routes to invest money in the market. Still, they do not guarantee positive returns. However, factors like the investment period, timing, market cycles, etc., may all contribute to what you may finally receive as a return on your investments.

According to a study by Geojit Financial, an investment services company, “The performance of a SIP investment depends on the market levels at the time of valuation (whenever one does it). If the markets or a fund’s portfolio are on the upside or in a rallying mode, one will notice that SIP returns are better. On the other hand, if the overall markets are in correction mode or are declining, the SIP returns can be lower (there could be exceptions regarding certain categories like sectoral, thematic and international funds).”

The report studied the rolling returns of SIPs (the annualised average returns for a period) in the Sensex from September 1996 to July 2024 to understand the probability of profit and found that “periods beyond 7 or 8 years, stands better chances of higher returns”.

Returns In Different Periods

The compounded annual growth rate (CAGR) for an investment period of 3, 5, 7, 10, 15, and 20 years shows negative minimum returns over three and five years (-29.0 per cent and -12.1 per cent, respectively). The returns increased over longer period. For a seven-year period, the return turned positive at 0.5 per cent, and increasing to 11.4 per cent in 20 years. On the contrary, the maximum returns were higher in the short term and decreased over the long term, from 58.9 percent for three years to 16.4 per cent in 20 years.

In any non-guaranteed investment scheme, the time of investment is crucial, as it affects the final return. It is because markets go through cycles, so investing during a low phase could generate better returns than when the market is high.

Chances Of Above 12 Per Cent Return Over Different Periods

The study shows that for a five-year SIP, the probability of above 12 per cent CAGR (on a monthly rolling basis) was 60.7 per cent times, whereas, for over 10 years, the chance of above 12 per cent return was 78.6 per cent times. The probability of positive returns grows over time.  The chance of above 12 per cent CAGR for over a 20-year SIP stood at 99.6 per cent, shows the data.

These numbers reflect the equities’ volatile nature in the short term but also have a higher chance of positive returns in the long term. “During those instances when the returns were lower, continuing SIPs for a slightly extended period turns the experience from below average to better average. Patience gets rewarded,” the report says.

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So, if you are investing in equities through SIPs, you could see negative returns in the short term if the market is unfavourable. In that case, you can stay invested for a more extended period, at least seven years, to turn the below average returns to better average returns.