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Equity Investing: Indexing & Beyond

“Market Linked Investment Returns Work On Probability Not Guarantee”

 

Simple strategy to have probability of winning on your side - follow the “Forget It” Plan, which is: choose an equity index fund, keep deploying money in the same as per chosen frequency. Of course, deploy decent amount of capital if you want to accumulate sizeable corpus at the end of your investing horizon. And before you start off, decide your horizon (investing + holding period) and the exit strategy too!!!

 

And then there’s  what I term “The Active Plan”. This is for those who want to generate “better” returns than just tracking the indexes. Let’s call it “The Index Plus” approach. Alternatives for “Index Plus” approach which I can think of:

 

o   Invest in some stocks directly rather than going through the mutual fund route. If one get’s the right pick, deploys sizeable amount and is able to hold the same till the stock price runs it’s course, returns can be akin to winning a lottery. And as happens in a lottery, probability of winning, and that too big is low

 

o   Give a dash of actively managed mutual fund to your indexing plan. Though history has not been very kind to such funds if one compares the performance with like to like benchmark / index funds. I would steer clear of such an option and stick to “Forget It” plan

 

o   Market Timing: Chose a percentage of your capital with which you would like to play the market timing game. For example, rather than 100% equity index deployment, toggle between 75% to 100% equity allocation and balance in non equity mutual funds. What I like about this approach is downside is very less. I personally prefer this approach

 

o   Sectoral Allocation: One can think of directing some capital in sectoral index funds like Bank, Information technology, Pharma, Auto etc

 

o   Market capitalization bias allocation: One can toggle part of capital between large, mid and small capitalization index funds. Not to forget, now we have micro capitalization index fund too!!!

 

And before you proceed with the “Active Plan”, revisit the “G” word again - there is no guarantee that any strategy mentioned in “Active Plan” will decidedly do better than the plain jane “Forget It” plan. Equity markets are mostly efficient and window of opportunity to beat the market is rare and short. Only way I can think one can beat plain indexing is by taking a contrarian approach which have high probability of securing better returns if one is quick and daring enough to try!!! 

Comments

  1. Ashwin YadavSeptember 22, 2024 at 8:47 PM

    A logical and flexible approach which touches both spectrums of investing risk and safety both

    ReplyDelete

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