While all this may seem like an investment required, there is a lot of effort, time and cost involved. Despite all this, there is no guarantee that this strategy will work in the long run. estate.
Instead, a retail investor can adopt a simple buy-and-hold strategy to build wealth. long term. Here’s how one can go about it.
What is a buy and hold strategy?
To understand the buy-and-hold strategy better, let us see how the actively managed strategy works in a mutual fund scheme. actively managed mutual funds Watch them outperform the index they have benchmarked themselves against. There is frequent buying and selling of shares according to their reading of the markets. For this they should be aware of the ups and downs of the market as well as the various stocks that they can choose from.
a buy and hold strategy (also known as passive investment) belongs to the other end of the spectrum, where funds buy and hold a fixed basket of stocks for a long period of time without frequent transactions or changes in the basket.
How to adopt a buy-and-hold strategy?
Indexes like Sensex or Nifty 50 are considered as a barometer of the performance of the stock market of the country. The indices are a basket of well-performing, financially sound companies from key sectors of the economy such as information technology, finance, FMCG, oil & gas, consumer durables etc. Currently (as of September 2021) both Sensex and Nifty have stocks in 13 best performing sectors of the economy.
A buy and hold strategy, therefore, advocates buying and holding index stocks for a long period of time to build wealth. Passive investing takes place on the premise that the market works efficiently and gives long-term returns by buying and holding investments.
Demonstration of buy-and-hold strategy
index fund It has given an average return of 14.37% against the benchmark return of 15.67% for the 10-year period backed by the Sensex. The Nifty 50 backed index fund gave 14.16% return, while the index’s return during the same period was 15.41 per cent. During the same period, the average return of actively managed funds as the benchmark of the Sensex was 13.6% and those of the Nifty 50 as the benchmark was 15.28%.
The returns shown here are calculated on the regular schemes of Index Mutual Funds. Direct plans of mutual funds (introduced in 2013) are plans that are purchased directly from asset management companies without the involvement of a distributor/agent. These plans are available at very low expense ratio as no commission is paid to the distributors/agents from the total expense ratio and hence, replicate index returns better.
On the other hand, the S&P Index vs Active Funds Scorecard SPIVA published by S&P Global reveals that actively managed funds underperformed their benchmark 1-, 3-, 5- and 10 (especially in the large cap and ELSS category). ). – The duration of the year.
In the 10-year period ended December 2020, 68% of large-cap funds and 58% of ELSS funds failed to meet the index returns. Average returns for the fund in the large-cap cap category for 1-, 3-, 5- and 10-year periods were 14.98%, 8.34%, 11.77% and 9.69%, respectively, as against benchmark returns of 16.84%, 9.94. %, 13.22% and 10.11%.
Tools that can be used with a buy and hold strategy
A buy-and-hold strategy can be adopted by choosing an index fund or an exchange-traded fund (ETF). Both index funds and ETF funds mimic the exact structure of the index they follow.
For example, Nifty Index Fund or ETFs The Nifty 50 index will have all the stocks in the same percentage. If Reliance Industries has 11% weightage in the index, then 11% of the index fund’s portfolio is invested in Reliance Industries.
Index Funds: One can buy and redeem index funds from any fund house/asset management company like any other mutual fund. The expense ratio of an index fund is much lower than that of an actively managed fund. The maximum average expense ratio of an active fund is closer to 2% while it is around 0.15% for an index fund. This difference in expense ratio can make a huge difference in returns when an investor invests in a fund for a long period of time.
ETFs: An ETF is a basket of stocks that are listed and traded on a stock exchange. One can buy/sell a single unit of an ETF during market hours. The expense ratio of an ETF is less than the expense ratio of an index fund. But the major factor that should be considered while investing in ETFs is liquidity which is nothing but the presence of sufficient number of buyers/sellers at any point of time for trading. This is in contrast to an index fund which can be bought/redeemed from an AMC at any time. Also, you need to have a demat and trading account to invest in these schemes.
what you should do
In mature markets like the US, most equity investments flow into passive funds. As equity markets in India become more mature, there are now fewer avenues for better stock-picking, which makes it a strong case for a passive, buy-and-hold strategy.
Warren Buffett said, “If you don’t make money while you sleep, you’ll keep working until you die.” Adopting a buy-and-hold strategy by investing in indices is one way to make money while you sleep.
(The author is Business Head, Finity, an app-based wealth management platform.)