A Portfolio-Based Approach Reduces The Risk Of Equity Investments

As a part of the Ideas Team at Japanese investment bank, Nomura, Anugrah Shrivastava, founder and head, investments, smallcase Technologies, was instrumental in building thematic portfolios for institutions in India & South East Asian markets. Anugrah knows a pattern when he sees one based on a theme or development in the market. He founded smallcase Technologies precisely so that individuals can benefit from a theme or an idea. In an interaction with BW Businessworld’s Clifford Alvares, Anugrah explains the portfolio concept and how it works in good times and in bad.

We seemed to have run into the wall of volatility. It’s tricky for investors to invest now. How do you see the markets?

Yes, these are challenging times. Only in August, the broader market indices were at all-time highs. But equity portfolios of most investors were in the red even when Sensex and Nifty were in the green. Towards the start of September, the broader markets too started to see red. 

The newspaper headlines don't really paint a rosy picture. Global cues are weak, the rupee is falling, crude oil prices are rising. In fact, ever since the stock markets corrected earlier this year, investment portfolios have been in the red. Wise investors have understood this volatility to be an excellent buying opportunity and have kept their faith in equities, which has proven to be the ideal investment to create long-term wealth. 

Some retail investors did try to buy the markets for about two months, but it did not turn out all too well.

Sure, we invest during the bad times with the belief that when the markets do well, our investments will also do well. But that didn't happen back in August when the markets touched all-time highs. That was because the market rally at that time was driven by just a few large-cap stocks. While Sensex and Nifty, indices that comprise large-cap stocks, were rising, their mid-cap and small-cap counterparts were still having a rough time. Even within Sensex and Nifty, only a few stocks had contributed to the rally. 

These were big names like TCS, Reliance Industries, Hindustan Unilever, HDFC Bank and Infosys that did exceptionally well. The green that we saw was because of these big names; the rest of the stock markets were going through volatile times.  

How should a long-term investor approach his investments?

Irrespective of market conditions, investors can use a three-pronged investment strategy. The mantra is long-term investors should continue investing systematically in equities, invest in portfolios and diversify across asset classes. 

Various studies by different organisations have shown that equities have beaten other investment classes like real estate, fixed income and gold over different time periods. No matter what is your holding period, if you want to create real wealth through your investments, they have to be made in equities. But yes, it's also true that equities are risky. However, there are ways to mitigate these risks and at the same time, continue to benefit from your investments. 

Second, equities are risky when you invest in individual stocks or you don't carry out the adequate amount of research. Buying one or two stocks on the basis of tips has never helped anyone meaningfully. What will always help is investing in a portfolio of stocks that has been carefully researched and built by a team of expert analysts. 

So you are advocating a portfolio approach to building wealth?

It’s important to build a portfolio. Build a portfolio of stocks or ETFs around a specific idea, theme or model. This portfolio-based approach reduces the risks associated with equity investments and allows the investor to benefit from the upside potential. And to further mitigate risks, an investor can also consider investing in other asset classes. 

How should you go about diversifying your assets now?

You need to diversify your investments across fixed income and gold. Fixed income investments will give you largely positive returns while gold will act as a cushion when the markets are tempestuous. 

A good way of achieving this diversification effectively is by investing in the All Weather Investing smallcase, which uses an intelligent algorithm to determine the ideal asset allocation mix across equities, gold, and fixed income. This exposure is attained using 4 ETFs. 

As a passive investment strategy, the All Weather Investing smallcase might not give you blockbuster returns, but it will also not erode your returns during bad times. What is happening to the markets today or this week or this month should not be a major factor of consideration if you are investing for the long-term.