Factor Holding Periods for Excess Returns

The NSE has different “strategy” indices that reflect some well known equity factors like low-volatility, quality, momentum and value. They are all shown to out-perform the NIFTY 50 TR index since inception:
cumulative returns of NSE factor 'strategy' indices

However, the excess returns of these indices, like everything else in equities, is unevenly distributed. As an investor, it could get frustrating to watch their “quality” factor investment under-perform the plain-old NIFTY 50 over many months. So broadly, for a given factor/strategy, what should the minimum holding period be for an investor to see only a positive excess return?

holding periods and excess returns for different factor/strategy indices

Factors take time to work. The longer the holding period, the less frustrating the experience. Low-volatility and Quality have the shortest holding periods of 5 years. The Alpha and Value indices require about 10 years for investors to see only positive excess returns. Also, given the lack of liquid, low-cost ETFs and index funds that track these factor indices, investors have to also contend with STT and capital-gains tax if they go the DIY route.

The edge that statistical factors have over market-cap based indices are measured over decades and require investors to be patient.

Charts and code on github.

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