Can short term investment in equity MFs give you good returns?

  • Posted By :
  • Thursday Sep 07, 2017

Key takeaways

  • Equity Mutual Funds are ideal financial instruments for potential returns over a long term
  • Capital gains from these MFs held over a year, convoy complete tax exemption
  • True valuation depends on fundamentals and you cannot judge this aspect in short term
  • Withdrawing from an Equity MF before the minimum holding period incurs considerable exit load
  • Traders and investors are unlike in their investment timelines and ambitions


If you are looking for a short-term investment, signing up a Mutual Fund the SIP way can reap certain amount of returns as expected; however, if you are looking for investing for less than three years, then we would not advise you to invest in Equity MF. The reasons for this are pretty much straight-forward.

  • The primary factor is the volatile nature of the share market which is linked with political circumstances and the global trade and industry stipulation

  • Secondly, Inflation which has causes revolving around the country’s economic growth.

Both these facets are rather unpredictable and in interim conditions pose substantial amount of risks if considering Equity.

What should be your  objectives as a short term investor?

“How soon can my money grow with minimal risks in a shorter duration?”

We will answer this question as follows:

  • Anything which grows into something gargantuan requires dedicated nurture and time. Now this contradicts your short-term objective as an investor in regards to the duration you look at.
  • Short term investments in equity parade definite inflated risk-levels since equity’s nature primarily is high risk; nevertheless, which is beaten with endurance (in terms of time) for substantial returns.

What is Equity?

Understand that the index points of a company are driven on a two-pronged entity; fundamental and technical. Furthermore, we cannot time the stock market. Fundamental level decisions mean increased competition, management change, product/service specific stipulation or in one word any macro-changes within the company (stock). Reflection of a stock’s growth is seen in long term. Nonetheless, technical reflection in the market can be seen on a daily basis. With any major political announcement which stirs negative sentiments among the masses, market is observed to swing negatively and vice versa. In such scenarios, if you have to redeem units, you are bound to witness negative returns (or positive returns); but with no certainty. However, sentiments change with time and so the technical effect on the volatility is dismissed when investments are made on a long term. One cannot expect the market to change rapidly in short range.

On the other hand, short term is good for traders since they aim to get benefits from the volatile nature of share market. These are thorough professionals sitting in the market, who know it well and most importantly have a far better financial capacity than investors and a completely different goals. Traders make money based on sentiments while investors make money based on intellectual analysis of fundamentals.

Understanding with an Example

True valuation depends on fundamentals and you cannot judge this aspect in short term. For instance, if there is a decrease in the value of a specific raw material, prices associated with that particular industry’s stock will decline nonetheless on a period of time will revive and may even boost significantly. A one quarter profit or two quarter profit/loss doesn’t make a difference unless a stock has been performing particularly over a period of time (at least 1-2 years).

We take the most recent demonetisation as an example. When it was announced in November, we saw significant downfall in the stock exchange in that month and December; however, it underwent restoration and has regained considerably on the current date. Below graph is taken from for the period of 1 Nov 2016 to 17 Jan 2017.

This proves that when considering short term gains, it is not advisable to invest in Equity due to its associated flux. 

Why is Equity Profitable?

When making investments, try investing maximum corpus in Nifty shares (these are fundamentally strong profiles), hold them for at least three years and constantly review your portfolio for maximum gains. Another important aspect in Equity is diversification. Cleverly investing through different sectors (IT, pharma, etc.) and caps (small, mid, large and multi) can by a long way warrant expected returns. Diversified Equity Mutual Funds provide two major benefits of a risk-adjusted performance and an inflation-adjusted return.

Based on our analysis, it is evident that short term investments in Equity are not vehicles for substantial returns. As sensible investors, your goal should be to double your capital in 5 years and likewise increase gains by four times in 10 years. This is the kind of benefit that can be accomplished with Equity MFs

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