There are two major approaches for an intelligent investor who want to manage their equity investment actively:
Filter from common list of nifty-alpha-quality-value-low-volatility-30 and nifty-dividend-opportunities-50, then based on stockreports.zerodha.com, www.tickertape.in, marketsmithindia.com/mstool/evaluation.jsp, and Morningstar make some purchase after moving cash into the trading account. Then track their performance against Nifty and from time to time move out some funds and move in some funds while taking care of not missing on the dividend by a few days. Decide to add more funds from time to time. Update the transactions in Value research, MProft, Perfios, Morningstar, and Marketsmith to have running analysis to take the correct decision. Needless to say that perceived risk increases as the amount increases and the chances to beat the Nifty diminishes unless very high concentration bets are taken and a lot of time is invested to manage a portfolio. This will also mean more transactions.
The other approach is to just switch between UTI Money Market Fund Direct Growth and UTI Nifty Index Fund Direct Growth based on marketsmithindia.com/mstool/marketOutlook.jsp. After a fall it is difficult to say if a particular factor-based index will rebound quicker or the index but it is sure when the market recovers it means the Nifty index is recovering. This does not require any more analysis. Even if the index fund crashes very suddenly it is okay to stay invested in it rather than some other active or factor-based index. This can handle the maximum amount of investment, a few crores are very easy to handle this way. Switching between funds of the same AMC does not even require the involvement of a bank. Reporting and tracking of MF will happen implicitly and with ease and accuracy along with all other MF. This is a simple approach. This approach can be mastered over time. This will have lesser transactions due to the nature of the approach itself. As long as the investment stays in debt it is growing at a nominal rate without losing value and waiting for the next run to enter Nifty. This is an almost optimal scenario. This way there will be liquidity available during a huge crash to make the most of it (provided the huge crash wasn't very sudden and the fund was not already in Nifty). This loosely means cash can be immediately deployed from the salary account in this scheme and it still maintains fair liquidity. The tax processing gets done along with other MF. This is likely to beat active MF due to low expense and an improved process over time. This will also increase the understanding of investment and how it is behaving. MF can not do this because they are restricted by rule to stay invested in equity at all times up to a certain minimum percentage plus they have huge fund volume to do this quickly enough but a retail investor with only a few crores at max can deploy this approach.
In favor of the second approach, money is made in the stock market in the bull runs, because it is not possible to time the market and know exactly when that heavy rain of the decade starts it is best to stay invested, otherwise you are waiting outside for the dip to enter and the market goes onto newer heights. But while you are invested you also experience the downs acutely and if you pull out then you reap a loss and lose capital. By dispassionately participating in the Nifty roughly during each bull run by entering a little late and leaving a little early before it turns into a bear run you reduce the volatility and still run a fair chance of catching the rain of the decade. Tax management may 'feel' burdensome but it adds nothing to the existing MF tax calculation. And because this is the Nifty we are talking about you will have all information available in public! You won't need to research and hunt and do stuff that you need to do with direct equity. This is made possible only due to a low-cost direct Nifty index fund and a low volatility direct debt fund and the ability to switch between them with one click without any exit load - this situation was not present earlier! This works around the challenge with ETF liquidity and tracking error besides obviating the need to move funds between bank and trading accounts.
We have to switch at the start of every ConfirmedUptrend and again at the start of UptrendUnderPressure. There should be less than three-four such opportunities in a year typically, which is less than ten switches. Even here most of them will be less than debt fund gain or an outright loss, although a minor one. What we are hoping to catch is the rain of the decade with maximum capital preserved till entering it to make the full of it and exit gracefully. This will also make one aware of the challenge faced by MF and the risk of investing in equity. This will also dispel the myth of compounding. There is no compounding and you can always do better with lumpsum that SIP if you are paying a little attention. Generating alpha by investing a lot of time is the game that active mutual fund managers are trying to achieve while restricted from exiting equity completely at any point in time. Many fund houses are calling this strategy with different names. Samco calls it SmartSIP, Finpeg call it Alpha SIP except that they do not have an exit strategy. The next obvious question is how is it different from a well managed dynamic fund? Truth be told -- it is not very different from them! A dynamic fund or a multi-cap fund (by moving among different fund categories and sectors) is doing the same! This manual hula hooping helps only when there is a mix of bull run and bear run, it is likely to save from the pains of the bear run and also take benefit from the bull run. But if it is a secular bull run a large-cap fund is better placed, it is going to reap the benefit of each rise in the market because it stays invested while you incur headache and lost time and money due to the multiple entry and exit. So this strategy presumes a discipline, understanding, and uncertainty in not outperforming a vanilla mf. The advantage is that you are in charge, you gain insight into investing, you get rid of the myth of compounding, and you may be able to reduce volatility and match the Nifty index returns while lagging it slightly due to taxation and the difference between TRI and PRI. Use TRI for the index but PRI for the strategy because you are not remaining invested during all the dividend dates, you are entering and exiting. Because it is equity, the 15% taxation is less even for short-term capital gain if you are in the 30% tax bracket. If you master the art over time and if at all you face a steep market correction, you will have the capital to benefit from it. And the odds of this happening is reasonably good for a long duration of ten years. This is the only narrow scenario where this strategy can outperform a simple multi-cap or dynamic fund but it will always add value to your understanding and keep you grounded. It will keep you away from riding imaginary clouds of making wealth in equity without planning for churn, high capital deployment, facing volatility, conducting intensive research, and managing diversification.
The key is to own this strategy, keep the expectations low and focus on achieving low volatility and decent returns while keeping it simple! Over a decade this can make you wealthy!
Remember that this strategy is possible only because of the following features, it wasn't possible before:
- No commission direct funds.
- One AMC has both, a good, low-risk debt fund and low tracking error Nifty Index fund, both with low expense ratio.
- There is no exit load on these two funds.
- It is possible to switch between these two funds with exactly one click!
- Most importantly we have a good and reliable indicator of Market direction.
- The market will always provide more than sufficient liquidity for this strategy. There is no liquidity risk.
- While we are out of the Market we avoid capturing the downside and also increase the investment.
- Corporates and MF cannot adopt this strategy due to regulations and volume.
- There are limited switch-in/switch-out, less than ten in a year, which makes it possible to follow this humanely.