Is it too risky to invest for 1 year if I am investing in equity funds?Asked
When it comes to equity - the longer the duration, the better it is.
Equities are listed on stock market and hence follow the ups and downs of the market. In long term, however, the probability of loss goes down.
Coming to the ideal duration to invest in equity funds, there is no such standard rule. Typically for less than a year - equity funds are very risky.
Consider this if you had invested in DSP BlackRock Microcap Fund (a small cap Fund) on Jan 2, 2008 and held it for one year, you would have lost more than 60% of your holding. This is just an example how risky equities can be in the short term. By the way, it is not just this fund that performed badly, almost all the stocks and funds suffered this kind of loss. It took almost 5 years for this fund to come back to the same level as Jan 2008. So 5 years still bit risky. Lets fast forward to Sept 2017. The fund is now up more than 250% from the Jan 2008 when you had invested hypothetically.
In equity funds, there can be multiple type of funds with various risk level.
Large Cap Funds carry lowest risk among all equity funds. Large cap funds hold stocks of very large companies like Bharti, Infosys, HDFC Bank etc. These are very stable business and do not fluctuate much. In the same time frame that we considered for DSP Blackrock Micro Cap Fund (small cap fund), one of the most popular large cap fund Reliance Top 200 went down by less than 50%. As of September 2017 it is up by 125%.
Diversified Funds, also called Multi Cap funds invest in all types of companies but are riskier than Large cap because they invest in mid cap and small cap as well.
Mid Cap Funds are riskier than large cap and diversified funds. But lower risk than small cap funds.
Small Cap funds are riskiest of all except for sector funds. Sector funds invest in a particular sector and carry more risk than small cap funds as well.
The riskier the fund, the higher the duration one should hole equity funds.
Bottomline: as a rule of thumb
For Large cap and multi cap, one should hold for at least three years.
For small cap and mid cap funds, one should hold for at least 5 years.