'Basket' approach offers better risk-adjusted returns

Traditionally, in financial markets, investments in equities have been rewarding in the long term

- BY RADHIKA GUPTA

THE ONGOING VOLATILITY in stock markets is making investors rethink their investment plans in equity funds. Many of these entered the stock markets in the recent past and hence this is the maiden meaningful correction for them. No wonder, falling stocks trigger 'butterflies in the stomach', but the past informs us that this can be an investment opportunity for a long-term investor.

Traditionally, investments in equities have been rewarding in the long term. For example, in the past 20 years ended on January 31, 2025, Nifty 50 TRI has given 14.4% returns. Put simply, the money has multiplied 14.6 times. Over the same period, Nifty500 TRI has given 14.7% returns, which has ensured that the money multiplies 15.5 times.

The compounding of money in stocks in the long term is possible because the underlying businesses of companies tend to benefit when the economy grows. Companies with pricing power tend to efficiently grow their profits and generate cash pools for shareholders. Along with growing profits, valuation multiples also expand and in turn reward shareholders. Hence, stocks have the potential to offer returns over the rate of inflation in the economy.