Strategy - Part I

Investment Management

Great, now we know our investment choices. But we still don't know how to manage them. For now lets concentrate on Mutual Funds, we will cover Stocks & ETF (Exchange Traded Funds) in a separate section.

Lack of knowledge:
  • What funds to select from so many choices I have?
                Funds selection is very essential especially if you want to build your wealth. Think of this like traveling from point A to point B in a vehicle. If your vehicle
                selection is right, in this case fast vehicle then you will reach your destination faster, Isn't it!
  • I do not have enough knowledge to pick the right funds
                No problem-mo! We are not designing a space-ship or building a rocket. We don't need to be a market wizard. All we need is a technique to
                enter and exit the markets at the "approximate" right time with proper funds selection. Remember, its the game of probability, all we need to
                do is make sure our odds of winning are higher.
  • How many funds shall I diversify my savings into?
                Not more than 3 to 5 funds. Why!!! Mutual funds are nothing but a basket of multiple financial instruments. If you are holding 1 Mutual Fund then
                you are already invested in bunch of financial instruments, in short you are already diversified. Investing in 3-5 Mutual Funds means you have
                more than enough diversification as you are well secured.
                Remember:-
                    More diversification = Less returns
                    Balance your risk and reward
  • Can I avoid getting sucked into financial crisis? or avoid being on wrong side of the market!!!
                Yes, you can! With some simple techniques, we can identify warning signs and take clues to enter and exit market. In short, when times are
                not good, we move money from Equity Mutual Funds to Debt or Money Market Funds and enter back at the right time.

Are you with me so far!!!!

Whats the Technique?

For any Strategy or Technique to work we need discipline and need to abide by certain rules.

Follow the rules:
  1. Capital preservation - Safety is most important
  2. Grow capital at faster rate - Vehicle selection is crucial
  3. Avoid financial crash - Avoid pitfalls and wrong turns
Below discussion is pertaining to investment in Mutual Funds (MFs)

Lets use an example and see how it applies to money growth:
I want to go from point A to point B.
  • I want to grow my money consistently and achieve my target.

I want to reach safely.
  • I need to invest in safe financial instruments.

I need to choose right mode of transportation which is safe yet fast to take me from Point A to Point B.
  • I need to choose right Mutual Funds, which can provide maximum returns.

I need to avoid major accident or get out of my vehicle before it runs out of fuel or avoid taking wrong turn.
  • I need to avoid financial crisis or any down turns in the financial markets or avoid getting in stock markets at the wrong time.

Momentum based portfolio allocation with Market Timing

Typically, many Mutual Funds have restrictions such as we cannot trade frequently, should hold for at least few days/months, etc to avoid fund fees. With such restrictions, how do we maximize our returns and more importantly stay out of the markets when it takes a tumble. We would like to capture big moves in the market but certainly want to avoid market crash & big draw downs.

So we identify which Funds to choose that might be probable best performers when we get the market entry signal and move out of these funds when we get the exit signal or when our chosen fund is not amongst the best performers.

Really!!! Can we identify funds (which might be the best performers in future) ahead of time!!!
  • Remember, we are ONLY trying to identify funds whose probability of performing in future is higher
  • We identify funds based on relative strength (Fund NAV closing prices of a recent trading period)
  • e.g. If I ask you to bet on a horse in Derby before the race starts then which horse will you pick? Naturally, the horse which has a track record of winning in past 3-5 races, right!!! Now, if I ask you to bet on a horse in derby (after the race starts) after 1st hundred feet then which horse will you pick? Certainly the one running fast reaching the 100 feet mark, Isn't it!!! We apply similar logic to pick our funds.

Remember, past performance is not guarantee of future performance, all we are trying to do is have the "probability of winning" (odds of winning) in our favor.