The 7-Year Rule Explained: Equity investments have historically delivered positive returns over longer holding periods and remained one of the most effective tools for beating inflation, according to financial experts speaking on Zee Business.
Discussing a study on long-term equity performance, Pankaj Mathpal, Managing Director of Optima Money Managers, said equity as an asset class may witness volatility in the short term, but has the ability to beat inflation over longer periods.
“Equity definitely has short-term fluctuations, but in the long term, it is an asset class that has the ability to beat inflation. Investors need to have patience,” Mathpal said.
He noted that while fixed deposits may appear more attractive during periods of market weakness because they offer assured returns, history has shown that equities have delivered positive outcomes over longer investment horizons.
Citing long-term market data, Mathpal said the Nifty 50 has generated a compound annual growth rate (CAGR) of around 12 per cent over the past two decades, demonstrating the wealth-creation potential of equities for patient investors.
Risk vs Volatility
Prathiba Girish, Founder, Finwise, emphasised the distinction between volatility and risk.
“We often use risk and volatility interchangeably, but they are different. Volatility is a characteristic of equity investments, whereas risk refers to the possibility of capital loss,” she said.
According to Girish, while short-term returns can be unpredictable, the probability of negative returns has historically declined as the holding period increases.
“If you look at a one-day period, the chances of negative returns are almost like a coin toss. Over one year, there is still a possibility of losses. But over seven years, the study found no instances of negative returns,” she said.
She added that investors who remain invested for seven years or longer have historically received positive returns and inflation-beating outcomes.
Why is 7 years called the ‘magic number’?
Mathpal explained why seven years is often referred to as the “magic number” in equity investing.
According to the study discussed during the conversation, investors in the Sensex who remained invested for seven years earned at least 10 per cent CAGR in around 85 per cent of cases. Even in the worst seven-year periods, returns were approximately 5 per cent, he said.
“If investments were made through a staggered approach such as SIPs, the minimum return over seven years was also around 5 per cent,” Mathpal noted.
He further said that data showed investors staying invested for longer periods saw increasingly favourable outcomes, highlighting the importance of patience and disciplined investing.
‘Time in the market matters more than timing the market’
The experts reiterated the importance of staying invested rather than trying to predict market movements.
Mathpal acknowledged that perfectly timing entry and exit points could theoretically generate higher returns, but said doing so consistently is extremely difficult in practice.
“That is why asset allocation becomes important. Since investors cannot accurately time markets, they should focus on giving their investments enough time,” he said.
He pointed out that all asset classes move in cycles and that temporary underperformance should not be mistaken for permanent loss of capital.
Equity’s role in beating inflation
Girish argued that one of the biggest risks investors face is failing to beat inflation.
“Even if headline inflation is lower, in real life many households experience inflation of around 7 per cent. If your investment only matches inflation, wealth creation becomes difficult,” she said.
She noted that long-term equity returns have historically exceeded inflation, creating real wealth for investors over time.
“Equity has the strongest ability to generate inflation-beating returns over the long term. That is why long-term portfolios should have meaningful exposure to equities,” Girish added.
Investment strategy for long-term investors
On investment strategy, Mathpal advised investors to consider equities only if they have an investment horizon of at least five years.
For most retail investors, he suggested investing through mutual funds rather than directly buying stocks, citing the research and monitoring required for stock selection.
“Investors should begin with Nifty 50 or Sensex index funds for long-term goals. As the investment horizon increases, they can gradually consider diversified categories such as flexi-cap and multi-cap funds,” he said.
Concluding the discussion, the experts agreed that while market volatility is unavoidable, historical data suggests that investors who remain invested for seven years or longer have significantly improved their chances of generating positive, inflation-beating returns.
“The market may test your patience, but if you stay invested for the long term, history suggests the outcome is likely to be rewarding,” Mathpal said.
