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Black Monday once again? Global markets in extreme volatile mode. Concerns over Chinese devaluing Yuan & their economy in downturn, its implications & forthcoming imminent Fed rate hike are some of the data points which will rock the markets for some more time. During such uncertain times, there is always flight to safety. This is reflecting in appreciation of $ v/s other currencies & Gold prices firming up once again.
India : a mixed bag
As far as India story is concerned; it is a mixed bag. On the positive side for the economy, commodity price corrections, crude price corrections, softening of interest rates (& likely cut in interest rates going forward), falling inflation, etc. are extremely positive macro factors. On the other side, Government's disability to push reforms further (due to Opposition parties) on land bill, GST, forthcoming state elections, Chinese currency devaluation & slow down, likely Fed rate hike, are weighing against the markets going up in a hurry.
Investor dilemma: buy, sell or hold?
Dilemma for investors is whether they should invest at these attractive levels or should they wait for further corrections based on some of the ongoing Global factors which will impact emerging markets negatively? Do we know whether this correction will be halted or will it continue? Is 26,000 the bottom for Sensex or is it likely to go down further?
When I conduct workshops for Independent Financial Advisors (IFAs) across the country, oft repeated questions are "where do I see the Equity markets or interest rates going forward?" My standard answer to that is that I never try to outguess markets - be it debt or equity. I rather put some strategies in place or identify strategies which rebalance between debt & equity on either daily, fortnightly or monthly basis based on certain pre-defined criteria like Price to Book (PB), Price to Earnings (PE) or Dividend Yield or a combination of any one or more of the above. Imagine plight of investor who invested at 30,000 level Sensex (based on excellent macro parameters) in the hope of equity markets scaling newer heights. First, they will be sitting on a huge negative portfolio, secondly, they would have no fresh cash to invest at current levels & lastly they may not have the guts to increase equity exposure with the expectations of further correction in equity markets.
Advice embedded strategies
However, there are some schemes in the Mutual Fund space which rebalance between debt & equity on regular basis based on some of the criteria mentioned above like PB, PE, Dividend Yield, Hedging NIFTY, etc. These strategies; besides protecting downside in such volatile markets also participate in Equity upside & at the same time will have enough cash in their kitty to take advantage of such huge corrections which happen in equity markets from time to time. When rest of the investors would be selling their equity positions (due to panic, etc.), these schemes would be increasing their equity allocations. They truly follow the concept of BUY LOW SELL HIGH. If the equity exposure was say 55% (approx.)in some of these schemes as of yesterday, they may increase their equity allocation to maybe 60% (approx.) & above (based on their internal formula) post today's corrections. They are dynamically reallocating between debt & equity based on market. These I call as ALL SEASONS SCHEME as investors do not need to time their entries or exits as the scheme is doing this on their behalf at regular intervals. At 30,000 level Sensex their equity allocation may have been as low as 40% (approx.); which slowly & steadily climbed to 55% to 60% (approx.) from January 2015 to now. (Sensex touched its highest level on January 29'2015 at 29,682).
Following table of Point to Point Returns from January 29'105 (Sensex at 29,682) to August 21'2015 (Sensex at 27,366 before today's carnage) will justify my faith in these strategies & schemes. I have identified 3 such schemes & AMCs which follow some strategy in equity investments based on above criteria:
ICICI Prudential Balanced Advantage Fund (BAF): rebalances between debt & equity based on Market PB on a daily basis. Equity allocation varies from 30% to maximum of 80% Motilal Oswal Value Index (MOVI): rebalances between debt & equity based on the MOVI Index created in house. Equity allocation varies from a low of 0% to 100% (if MOVI more than 130 or less than 70). You can apply MOVI to any of their equity schemes viz. Motilal Oswal Most Focused Large Cap 25, Multi Cap 35 or Mid Cap 30 Edeleweiss Absolute Returns Fund (ARF): which keeps a long position in equity from 65% to 80% & hedges NIFTY as & when markets turn volatile; thereby protecting down side during volatile periods
To know more on these schemes & strategies you can visit my blog: www.misterbond.in for detailed notes & explanations.
Even on any 3 year investment horizon these schemes have never generated negative returns i.e. their 3 year daily rolling returns have never been negative since their inception in March/April 2010 till date:
I strongly urge all investors & advisors to identify such schemes/strategies & invest in the same. This will ensure that at no point in time will you be overweight in equity (unless the formula says so), you will always have some cash in your kitty (through these strategies) to take advantage of such corrections & invest more rather than selling on such dates, you will not try to outguess markets, generate positive returns bias over 3-5 year investment horizons & have the discipline of BUY LOW SELL HIGH in your portfolios.
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