Strategy for ‘Getting Wealthy and Staying Wealthy’

Strategy for ‘Getting Wealthy and Staying Wealthy’

By Manuj Jain

Investment Return ≠ Investor’s Return: Over a long period of time, the Equity Market has delivered reasonably good returns. It is notable that Equity Market delivered reasonable returns ’on an Average’ but rarely delivered ‘Average Returns’ every year. As a result, very few investors actually stay invested for the ‘Long Term’ to take full benefit of the Market Movement.

Image Source: WhiteOak Capital. For illustration purpose only. Returns shown in the middle (Reality) table are Calendar Year returns for S&P BSE Sensex TRI from CY 2010 onward. Past performance may or may not be sustained in future.

Market Valuations mean reverting and by doing Dynamic Asset Allocation between Equity and Debt, an investor can take benefit from this volatility. It sounds very logical and simple to allocate more in equity when others are fearful (low equity market valuation) and to reduce equity exposure when others are greedy (high equity market valuation) but in reality, psychological barriers like “Greed & Fear” ensure that we end up doing exactly the opposite. Hence, lose out on potential gains from our investments.

Using Quantitative Valuation Model/Checklist to reduce portfolio volatility

A well-documented and practical “quantitative valuation model” can assess investment opportunities more objectively than relying solely on subjective judgments. These models can be beneficial when making investment decisions across multiple asset classes, such as Domestic Equities, Fixed Income, Gold, Foreign Equities, etc. Using a checklist while investing in the market can effectively reduce the impact of cognitive biases, ensure essential factors are not overlooked, promote consistency, and help stay disciplined.

There are several widely used valuation parameters such as the Price-to-earnings ratio (P/E ratio), Price-to-book ratio (P/B ratio), Bond Equity Earning Yield Ratio (BEER), Market Cap to GDP ratio, Gold Dollar Ratio, Developed Market to Emerging Market Valuation Premium/Discount, etc.

But then there are many other challenges. Not all market cycles are the same. Historical trends suggest that the market can remain Expensive or Cheap (over or under-valued) for a longer period of time as well. Also, what is Expensive or Cheap today, can become even more expensive or cheaper tomorrow. What should be the re-balancing frequency between Equity and Debt? Then there are operational hassles to execute all these transactions e.g. requires time for constant monitoring, exit load & other transactional charges (if applicable) etc.

Image Source: Internal Research of WhiteOak Capital. Graphs are for representation and illustration purpose only.Investing via Balanced Advantage Funds (BAF)

One of the solutions to the above-discussed problems is to invest via the Balanced Advantage Fund category Mutual Funds. These schemes primarily use Quantitative Valuation Models for deciding asset allocation between various asset classes. While selecting a BAF category scheme, investors can study the process followed by the investment team and make a better-informed decision based on their long-term investing goals.

(Manuj Jain, Associate Director, Co-Head Product Strategy, WhiteOak Capital AMC. Views expressed are author’s own.)