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A bull market Investment strategy
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A bull market offers a great opportunity to build wealth, but have a strategy to pick the right stocks
Investors who are convinced that the next bull market has indeed arrived, have only solved half the problem.
If timing is one component of the investment decision, selection is the other. Without a strategy to select correctly, gains from the equity market can get severely limited. There are four choices in equity: direct investment (DIY), equity funds, portfolio management schemes and private equity .
Direct investing can be alluring. The sense of control over the portfolio, the joy of seeing winning stocks turn into multi-baggers, and the challenge of constructing and managing the portfolio is a good high. But, not everyone can succeed in this task. Direct investing requires serious work and time. Investors, who think they can buy stocks based on information released in the media or broker reports, are only hoping to get lucky . If one is unable to devote time, it is very likely that the portfolio would generate below-average return.
Equity MFs are the easiest and cheapest way to participate in the equity market. A full-time fund management team constructs and manages the portfolio with the objective to beat the market index. Passive index portfolios are also available at a lower cost. This is a product that should have been the default choice of investors. But alas, funds have taken the option of "selling" and investors' experiences have been mixed. The largest participation has mostly come from NFOs that do not always do well, leaving large number of first-time investors with a non-performing product. As for performance, there are funds that beat the market, with a significant margin, but there is no telling which one would do so. Winners do not repeat and selection remains a tough task.
A lot that can be done to have equity funds as a simple and easy tool to participate in the markets. Simplification of product names is one such step: it is easier for an investor to compare and choose a set of mid-cap funds, rather than wondering if funds with fancy names are actually focusing on mid-cap stocks. Then, there is the need to merge and consolidate multiple products of a fund house. One can only wish that funds focus on existing performing products this season to make it easier and efficient for the investor.
At the beginning of the bull cycle, sector differences will be high. Not only will diversified equity funds have a sector bias, but sector and thematic funds themselves will do well. As demand for goods and services picks up, mid and small-cap stocks that take advantage of the revival will move up. As investment demand picks up, larger conglomerates will begin to perform. When the market picks up momentum, the bull run will be increasingly broad based. That will be the time to include large-caps as a buffer for any correction. Investors will do well to switch to diversified equity funds and then to pure large-cap funds when the market looks severely overvalued. Allocating to debt and underweighting equity should start when downside risks become higher than upside potential.
A clutch of 6-7 equity funds should be adequate for most. The weights to each kind can be modified based on the phase of the market. The core 20% of an equity portfolio should be a low-cost index fund of large-cap stocks. The next 30% should be in diversified equity funds.
SIPs should run in this core portfolio.
Two funds that belong to different fund houses will do the job. It is the remaining 50% that needs tactical rebalancing between mid-cap, thematic and sector funds. This segment should be reviewed each quarter and rebalanced each year.
To select a good fund means giving up the notion of being able to identify winners every time and to understand that past winners won't repeat. There are enough equity funds with a 10-year history -funds that have done better than their benchmarks and have stayed in the top 50% of their category in seven out of the 10 years; and funds that have stated clearly where they will invest and have stuck to that are the ones that should qualify . Investors who think that an NFO at `10 is cheap and a fund with an NAV of `100 is expensive, are wrong. This is equivalent to thinking that Nifty at 7,500 is cheaper than Sensex at 25,000.
Portfolio management schemes are for investors who think they have arrived and, therefore, will need stylish offerings that are different from the staid SIP. It is an expensive proposition with the untested promise of better performance. It is not tax-efficient. But good managers with flexible mandates can do well, especially in bull markets. Investors should be sure that they understand the product, the costs and the management style before committing themselves. Private equity is the choice for those who are not happy with the average market return.
PE investing requires a entrepreneurial mind set and the patience for returns.
A bull market offers an excellent choice for ordinary investors to build wealth. The earlier they come in, the greater their gains. It is critical to select and set up the investment process so that participation is strategic and not tactical based on tips and tricks.
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