For majority of investors, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities – Warren Buffett Many equity investors worry about the volatility of equity market. The desire to time the market arises from investor’s desire to avoid loss. But what exactly is loss? Is it decline in the value of investment or is it erosion in invested capital. For example, if I have invested Rs 1 lacs. The portfolio value was 1.5 lacs. However, after a market correction, the portfolio value is 1.2 lacs. So there has been decline in the portfolio value, there is NOT a capital loss.
Quantifying the probability of capital loss for SIPs (systematic investment plan) of different duration: I chose HDFC Top 200 and Franklin India Blue Chip fund, two of the longest existing mutual funds. We can do the same analysis using NIFTY but NIFTY total return data is not available from 1996 or so. We look at the ” growth ” option of these funds as that gives a better idea of the total return. We invest equal amount every month on the last business day of each month since Oct 1996 (Since we can get data from Oct 1996 only for HDFC Top 200 fund from Yahoo Finance).
We find that the probability of capital loss is less than 5% if the SIP duration is 5 years or more. Based on historical data, it is very unlikely that investor will suffer capital loss after a 10-year SIP period.
