Index funds are for investors who want to keep their equity investment simple. These funds follow a passive investment strategy, as they simply mirror the benchmark. The passive way of investing also makes index funds more cost-efficient than actively-managed funds. Hence, their portfolio and performance are all linked to a specific index.
Nevertheless, apart from the fact that index funds are passively managed, they are just like any other equity mutual fund. Therefore, how much you should invest and for how long you should stay invested in index funds will depend on your goal.
Going by conventional wisdom, you should invest in equity index funds for the long-term. But how long is long-term? What’s the minimum period for which you should stay invested in index funds? Let’s lean on data to find an answer.
How Long Is Long-term For Index Funds?
Ideally, your investment tenure should depend on your goals. But that said, there has to be a minimum duration for which you should choose equity investing. The data shows you should have a minimum tenure of 7 years or more when investing in equities.
The following table shows the rolling return of the NIFTY 50 TRI index for different time periods. The table shows when an investor stayed invested for a longer period, their chances of getting better returns improved.
| Rolling return of the NIFTY 50 TRI for 5-year, 7-year, 10-year and 15-year | ||
| Investment Tenure | Minimum | Average |
| Any 5 years | -1.03 | 15.43 |
| Any 7 year | 4.89 | 14.95 |
| Any 10 year | 5.13 | 14.22 |
| Any 15 year | 9.00 | 14.45 |
*Data from 1992 to 2022
As you can see in this table when anyone stayed invested for 5 years, there was still a possibility that their returns could be negative. But over a seven-year period and above, there was zero chance of making negative returns.
Besides, if you had invested in a NIFTY 50 index fund at any point between 1992 to 2022 for a minimum of 7 years, you would have earned an average return of more than 14%.
Why does this happen? Equity mutual funds experience market fluctuations in a short time. But over a longer tenure, market volatility is averaged out, which is unlikely in the short term. That’s why it’s prudent to align your long-term financial goals with index funds and stay invested for as long as possible.
But note that, while nearing your financial goals, you could lose a chunk of your investment corpus while withdrawing the money if you don’t have an exit strategy. Hence, it would help if you had an exit strategy planned for your investments.
How To Plan An Exit Strategy For Your Investments?
When you are closer to achieving your goals, for capital preservation, you should plan to exit your investments systematically. It would help if you were mindful of the tax implications and exit loads that apply when redeeming your mutual fund units.
In the case of longer-term goals, the exit plan must start before you have reached your investment goal. This is because, as you get closer to your long-term goal, you must move your investments from riskier asset classes to safer investment options to preserve your wealth.
However, do not do it in one shot. You need to shift your investments from high-risk options to safer options gradually. To understand this better, let’s take an example. Suppose you have a portfolio mix of 60:40 with 60% allocation towards equities and 40% towards debt investments. In that case, it will take four years to rebalance your portfolio to a 15:85 ratio with 15% towards equity and 85% towards debt.
| Asset Allocation Mix | ||
| Tenure | Equity Allocation | Debt Allocation |
| Year 1 | 60 | 40 |
| Year 2 | 45 | 55 |
| Year 3 | 30 | 70 |
| Year 4 | 15 | 85 |
(All fig in %)
As the table shows, you need to redeem 15% of your equity investments and increase your debt allocation by 15% yearly. This way, you can rebalance your portfolio to safer and less volatile options.
If you find difficulty in executing such complex strategies, there is a simpler solution. You can use ET Money Genius.
ET Money Genius uses asset allocation rebalancing strategies that have challenged top funds in all market conditions. Genius manages consistent performance firstly by investing in equity, debt and gold as part of its asset allocation strategy. And secondly, by regular rebalancing. It also ensures when you move closer to your goal, your portfolio is rebalanced in such a manner that you swifty move from riskier assets to safer investments.
Therefore, you can earn better returns with Genius through smart asset allocation and swift rebalancing. Besides consistent performance, it also offers a custom investment strategy. It first understands an investor’s investment personality and then suggests portfolios based on that.
Bottom Line
How long can you invest in index funds? Ideally, you should stay invested in equity index funds for the long run, i.e., at least 7 years. That is because investing in any equity instrument for the short-term is fraught with risks. And as we saw, the chances of getting positive returns improve when you give time to your investments.
