Is it a good time to invest?

When the markets are high, people are concerned. When the markets are low, people are concerned. When is a good time to invest?

When to invest

The equity market is driven by the share prices of various companies. But what moves the share price? Understanding this aspect can give us a better view of when to invest and what to invest in.

Father of value investing, Benjamin Graham says - "In the short run, a market is a voting machine but in the long run, it is a weighing machine."

In the short-term, mood of the market defines where the prices would be going. However, in the long-term, a company's performance defines the performance of the share price.

Can there be an analytical tool to assess the market mood?

Let us look at how you can assess the current mood of the market. This factor does not predict the future but focuses more on the present state i.e. whether the market is over or under-bought.

Factor = Earning yield + Dividend yield – 10 years government yield

A positive number indicates that the market is undervalued; else, you are better off in bond investing. At any point in time, the portfolio may be a maximum of 75% in equity and a minimum of 25% in equity.

Here are the investment rules you can apply:

1. Earning yield is reciprocal of current Price of Earning of NSE 500. If current PE is 30, earning yield would be 3.3%. (https://www.nseindia.com/products/content/equities/indices/historical_pepb.htm)

2. Dividend yield can be assumed as 1.50%.

3. Current 10-year government bond yield is 6.36% (https://www.bloomberg.com/quote/GIND10YR:IND)

Earnings Yield vs Government Yield

The current factor based on September 2019 data is:

Factor = 3.5% + 1.5% - 6.7% = - 1.7%

If the factor is between -1% to +1%, a 50/50 combination of short-term debt funds and equity mutual funds is recommended. However, any other range may indicate allocation to equity as 25% (< -1%) or 75% (> +1%). Based on the current data, it's prudent to maintain 25% equity and 75% debt.

No one in the world can predict where the equity markets will go. However, smart investors always know that they can always manage their risk better and returns are generated over a while.

The consistency of return while managing portfolio risk is more important than high returns during bull-run.

This is a broad asset class level understanding between equity and debt. However, it can easily help any investor, even those who do not understand finance, make tactical asset allocation decisions.

Disclaimers

• Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

• The securities quoted are for illustration only and are not recommendatory.

• Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Details of the advisor

• Advisor: Ankur Kapur

• SEBI RIA No.: INA100001406

• BASL Member ID: BASL1337

How can you handle market volatility, better?

When the market is rising, everyone is happy. When the market turns down, everyone panics. There are ways you can tactically, manage equity volatility.

Equity Investment

If your investment experience is good, you will continue to invest else you would prefer safer options say a fixed deposit. We never want to see the value of funds going down, especially over the long-term.

Here is the strategy you can use to reduce equity volatility. When the market is zooming, the portfolio will increase less than the market, and when the market is falling, the portfolio will not fall that much.

Think of a strategy when the equity market is down, you invest in equity and when equity is expensive, you invest in bonds.

There are two buckets, short-term debt and Nifty500. Nifty500 represents equity and can be substituted by a combination of mutual funds.

How can you understand when the market is expensive and when the market is cheap? by understanding the price to earnings ratio of NSE500.

And how do you understand when bonds are expensive or cheap? by understanding yield 10-year government bond yield curve.

Factor = 1 / PE + Dividend yield (1.57%) – 10 year government bond yield

If the factor value is positive invest 75% equity or else 25% equity. The rest stays in short-term debt fund.

This way you will be able to generate a return that is less volatile than the general market movement. Since you will reduce the volatility, achieving a 10% p.a. return over 5 years is quite achievable.

This is a conservative asset allocation strategy than a 100% allocation in equity. There are periods when the market crashes drastically, and this strategy will look extremely attractive. However, long-term return profile will be more favoring equity allocation for long-term, say 10-year plus.

This strategy helps in addressing the behavioral aspect because of downside protection.

Disclaimers

• Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

• The securities quoted are for illustration only and are not recommendatory.

• Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Details of the advisor

• Advisor: Ankur Kapur

• SEBI RIA No.: INA100001406

• BASL Member ID: BASL1337

How to better manage and grow your money?

Equity market's nature is to go up or go down. Your wealth will get destroyed if you get caught up in this euphoria or pessimism. You invest for your financial needs, irrespective.

Goal-based planning is the only way to invest

Your investment should ideally be managed based on your financial needs. Taking a need-based investment approach to managing your money is critical to achieving your financial requirements. It will also help in understanding the mix of investments within the portfolio.

Such an approach creates separate mental accounts and focuses on the fulfilment of those needs.

Salary credit every month does not guarantee you the lifestyle you anticipate throughout your life. Your circumstances and needs to keep changing. You need to plan and manage your current income and your future income according to your needs. These needs are your goals, your dreams.

Envisioning your dreams and putting them down on paper is the first step in making them a reality. Reflect on your life, your dreams, and your goals. Unless you know what you want to achieve, you will never be able to reach where you want to be.

When you are writing your goals, you have to prioritize. For example, a luxury car may not come before say a child's education or maybe your financial freedom.

Your priority goal should ideally be your financial security. Listed below are some recommended goals that can give you a jump start.

Financial Freedom: Trend indicates that more and more people want to achieve financial freedom early on. They may continue to work but having sufficient financial cushion creates phycological conform. Additionally, financially security provides self-respect during golden years and without being dependent on anyone else for the financial needs.

Buying a Home: Your first home is not an investment. It's an expense until you can afford to buy a second one. That's because you will always need a place to live. You should start planning to buy a house from the day you start earning. Unless of course, your parents own a home and you will continue to live in it. In that case, you can look at alternate real estate investments as a diversification option after you have a significant financial portfolio.

Emergency Fund: You should have a liquid emergency fund equivalent to approximately 3 to 6 months of your living expenses, which you can access immediately for any unforeseen or unplanned expenses. This will not only give you peace of mind but will also allow you the freedom from taking on an expensive debt in an emergency.

Being Debt Free: We live in the age of excessive consumption with multiple EMI's. You should try and reduce as many EMI's as possible. Not all EMI's are made equal – an EMI for a house loan is not an expense as it goes towards building an asset. However, an EMI for a high-end smartphone is an expense because your iPhone will start losing value the moment it's bought – and continue to do so till it becomes worthless after a few years.

Although each person is different and has different aspirations but to begin with, you can start by bucketing your financial goals into three broad categories: Essentials, Market and Aspirational.

Need bucket

At a minimum, you must protect yourself from the anxiety of a dramatic decrease in your current standard of living. Thus, you must immunize yourself from personal risk: the devastating impact of not being able to meet your essential cash needs, regardless of the performance of financial markets. Needs are those requirements that you may have to meet regardless of your good or bad financial situation.

Want bucket

Planning for child's foreign education, going on regular vacations, buying an expensive car etc. are usually your ‘want bucket' requirements. Since these are not your basic needs, you can plan to invest in instruments that can provide you with market exposure. However, you cannot afford to take an excessive level of portfolio risk even in want bucket.

Aspirational bucket

As the name suggests, aspirational financial goals are created to enhance one's lifestyle. Aspirational goals are motivated by the observation that sizable wealth creation requires a higher level of risk. These investments can exponentially increase your wealth or there may even be a possibility of a loss of principal.

Since each of the three buckets specified above will have a separate set of investment options, the return and risk profile will also vary. Therefore, any short term volatility in the markets will not severely impact your overall portfolio. If you segregate your financial goals across these three buckets and invest accordingly, you will not feel the heat and get caught up with short term market volatility.

These are broad guidelines that will apply to most people, every individual has specific requirements, which means you should allocate money based on your requirements and priorities.

Disclaimers

• Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

• The securities quoted are for illustration only and are not recommendatory.

• Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Details of the advisor

• Advisor: Ankur Kapur

• SEBI RIA No.: INA100001406

• BASL Member ID: BASL1337