With the Sensex already up by 50 per cent from its lows in August 2013, this bull market is beginning to look decidedly wobbly.

This has had mutual fund CEOs, portfolio managers and brokers trotting out their standard reassurances — “Despite the short-term volatility, the long-term bull market is intact. Hold on for the long term and equities will deliver a 15-20 per cent return”.

But how long is ‘long term’? What are the chances that you will end up making losses or get poor returns from equities if you take that advice?

We ran a rolling return analysis on Indian equity markets for the last 35 years to arrive at the following findings.

To avoid losses, hold for 10 years

If you want to avoid losses from your equity investment at all costs, be prepared to hold it for at least 10 years. Investors who held Sensex stocks for five years at a time faced a 9 per cent chance of a negative return in the last 35 years.

A rolling return analysis of the Sensex shows that there were quite a few phases in Indian markets where equities delivered a negative return to investors after a five-year wait. Those who bought into equities in October-December 2007, March 1997-April 1998 or November 1993-April 1994, all made losses on their equity portfolio after a five year holding period. Yes, these investors timed their investments to bull market peaks, but this is evident only in hindsight.

In contrast, holding on to stocks for 10 years at a time almost guarantees you a positive return. Despite big market crashes, such as the ones in 2001 and 2008, there have been almost no 10-year periods in the Indian market historywhen buy-and-hold investors would have made losses.

What this finding means for you is that, when fund houses or ULIPs in India make a pitch for a five or three-year investment in equities, don’t fall for it. If you plan to exit in 3 or 5 years, there’s a good chance you’ll be disappointed with your returns.

Want a 15 per cent CAGR? Wait for 10 years

Then there’s the promise market mavens make of an inflation-beating 15 per cent CAGR from stocks. But to get to this return, again, you need a holding period of more than five years.

Going back to that rolling return analysis, the Sensex has delivered less than 15 per cent CAGR nearly half the time (since 1980) on a five-year basis.

But stretch that holding period to 10 years and you vastly improve your chances. For 10-year investors, the market has served up a 15 per cent-plus return about two-thirds of the time. Not bad odds!

What this means to you is that if you’re planning for a financial goal that is just five years away, don’t count on equities to give you a 15 per cent return.

Budgeting for 10-12 per cent would be more realistic. If you’re holding mid- and small-caps, plan to hold longer. The above finding — that holding stocks for five years doesn’t guarantee great returns — holds doubly good for mid- and small-cap stocks. A rolling return analysis of the CNX 500 index from 1995 (inception date), shows that small- and mid-cap stocks tend to take much longer than large-caps to deliver a decent return.

For finvestors who held it for only five years, the broad market CNX 500 didn’t get to a 15 per cent return two-thirds of the time. For those who held on for 10 years, there was a 61 per cent chance of getting to that target.

Active funds improve your odds

But what about diversified equity funds that are actively managed? Do they fare better?

Well, running this rolling return analysis on the NAV of the Franklin India Bluechip Fund, a good large-cap fund, shows that the fund did fetch much better returns than the index, but not if you held it for five years. Held for five years, this fund gave investors a half and half chance of making a 15 CAGR.

But if that holding period was stretched to 10 years, the fund delivered a 15 per cent CAGR an impressive 92 per cent of the time. You also had a one in three chance of making more than 25 per cent.

To wrap it all up, if you’re keen on a 15 per cent-plus return from equities, don’t expect to cash out within three or five years; prepare for a 10-year wait.

And if you’re looking to maximise your returns in that 10-year window, don’t jump at mid- or small-caps.

Large-cap funds may get you there with much lower risks.

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