Decoding Risk and Return: Insights from 30 years of Market data on Equity, Gold, and Fixed Income

To quantify risk, we use the standard deviation of returns as a measure of volatility across the asset classes. The results in Table 1 indicate that equity carries the highest level of risk, with a standard deviation of 19%, followed by gold, while Treasury Bills (used as a proxy for fixed-income investments) exhibit the lowest volatility, with a standard deviation of around 2%. Interestingly, despite its lower risk, Treasury Bills also deliver the lowest median returns, whereas gold slightly outperforms equity in terms of median returns, challenging conventional expectations. This suggests that for risk-averse investors, equity and gold may not appear favourable from a volatility standpoint, even though they offer higher return potential over time.

To further explore how investment outcomes vary with time horizons, we analyze rolling returns over holding periods ranging from 1 to 15 years for equity and gold. For each duration, we compute the compound annual growth rate (CAGR), along with minimum, maximum, and standard deviation of returns, providing a more nuanced picture of the risk-return trade-off across different investment tenures.

The results of data analysis highlight a clear relationship between investment horizon and risk mitigation across asset classes. We summarize the findings here:

• Volatility Decreases with Holding Period: Both Nifty 50 and Gold show a decline in standard deviation as the investment horizon increases. For the Nifty 50, volatility drops from 19% for a 1-year holding period to just 2% over 15 years. Gold exhibits a similar pattern, declining from 13% to 1% over the same horizon. This confirms that longer investment durations significantly reduce portfolio risk, making a strong case for long-term investing. 
• Equity Offers Higher Upside but with Higher Short-term Risk: Equity (Nifty 50) shows a higher maximum return potential in shorter durations (e.g., 56% for 1-year, 43–45% for 2–4 years), but also carries the risk of negative returns, with a minimum return of -19% over a 1- year horizon. However, as the holding period extends, the worst-case returns become consistently positive from the 6-year mark onward, and volatility becomes negligible beyond 10 years. This underlines equity’s suitability for long-term wealth creation. 
• Gold Provides Stability but Limited Growth Potential: Gold displays moderate risk and return characteristics. The maximum returns are lower than equity at most intervals, and the minimum returns are negative only up to the 5-year horizon, turning consistently positive from the sixth year onwards. While its long-term returns are less aggressive than equity, its lower volatility and consistency make it an effective diversifier in a portfolio. 
• SIP CAGR Convergence at 14%: Interestingly, both asset classes yield a CAGR of 14% for a ₹10,000 annual SIP over the whole period, despite the differing risk profiles. This suggests that systematic investing can help smooth out volatility and enhance long-term outcomes, especially when applied consistently across market cycles.

Investors seeking wealth maximization should consider holding equity for the long term, ideally over 10 years, to mitigate downside risks and harness the compounding benefits. We also need to remember that since we used index values to calculate equity returns, we are not factoring in the dividend yield. Even if we assume a dividend yield of 1%, given the same amount of risk, returns earned by investing in equity would be over 15% more than those of Gold. Those with a moderate risk appetite or seeking portfolio balance may find value in including gold, particularly over periods of 5 years or more. Most importantly, the findings reinforce the idea that patience, diversification, and time in the market—not market timing—are the cornerstones of sound investing. We conclude with the words of legendary investor Warren Buffett: “The stock market is designed to transfer money from the active to the patient.”

Authors: Prof. Ruzbeh Bodhanwala, Faculty of Finance, FLAME University & Prof. Shernaz Bodhanwala, Faculty of Finance, FLAME University.