FDs vs equities: How rolling returns debunk short-term performance myths

“Financial planning experts often argue that equity markets outperform fixed deposits over the long term. However, I can demonstrate that a 10-year investment in fixed deposits has delivered higher returns than equity markets,” declared my friend Mitesh. An experienced professional, he often challenges investment philosophies.

 

Mitesh argued that liquid funds were equivalent to bank FDs, highlighting that from March 23, 2010, to March 23, 2020, they delivered 8 per cent per annum return, outperforming the 5 per cent per annum return of the equity markets (Nifty50 Total Return Index [TRI]) during the same period. To him, this proved that FDs outperform equities over the long term.

 

Mitesh’s analysis was flawed due to “starting point bias” and “ending point bias”. His chosen period ended on March 23, 2020— dubbed “Manic Monday”—when equity markets plunged 13 per cent in a single day due to the Covid-19 panic. The start date, March 23, 2010, coincided with a sharp recovery after the 2008 Global Financial Crisis. Shifting the timeframe slightly — from January 31, 2010 to January 31, 2020 —  changed the narrative: equity markets delivered 11 per cent per annum, outperforming the 8 per cent per annum from liquid funds.

 

To remove bias, I suggested analysing all possible 10-year periods between January 1, 2009, and November 30, 2024. To do this, we look at each working day as a potential starting point for a 10-year investment. The first 10-year period starts on January 1, 2009, and ends on January 1, 2019. The next period begins on January 2, 2009, and ends on January 2, 2019. This process continues for each working day until the 1,466th 10-year period, which begins on November 30, 2014, and ends on November 30, 2024.

 

The analysis revealed that equity markets averaged 13 per cent per annum, with a minimum of 5 per cent and a maximum of 17 per cent. Liquid funds outperformed equities in only 68 periods (5 per cent of cases), while equities outperformed 95 per cent of the time.

 

Over shorter timeframes, liquid funds performed better more often: they outperformed equities 11 per cent of the time over 5-year periods, 20 per cent over 3-year periods, and 33 per cent over 1-year periods. This underscores the importance of focusing on long-term rolling returns to avoid misleading conclusions.

 

When Mitesh asked how to guarantee being on the winning side every time, I advised adopting a systematic investment and withdrawal strategy. By systematically investing in equities over 24 months, holding for six years, and systematically withdrawing over the next 24 months, an investor could achieve a minimum return of 9.5 per cent per annum—significantly higher than the maximum 8 per cent per annum from liquid funds over any 10-year period. This disciplined approach ensures equity markets outperform liquid funds over a 10-year horizon.

 

Truth be told, many investors resist rolling return analysis, preferring specific-date comparisons, which are often skewed to favour certain narratives. The absence of readily accessible rolling return data further compounds this disbelief. Market participants often favour comparing performance over specific dates like 5, 3, or 1-year performance, especially when it favours them.

 

Strong, long-term returns don’t require complex strategies or perfect timing, just discipline, patience, and a systematic approach. Short-term comparisons often mislead investors, causing them to overlook the long-term benefits of systematic investing in stocks. 

 

As the investment review season approaches, remember: true success lies in trusting time-tested principles of systematic investing and a long-term focus. Simple strategies often deliver the best results.

 

(Equity market data is based on the Nifty50 TRI, and liquid fund data is derived from a Liquid Fund Index. Data is available on this link: https://bit.ly/3DxGgQL. Past performance is not indicative of future results).

 

The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; X (formerly Twitter): @harshroongta