Common sense strategy in current market scenario

[Shiju Narayan]

 

 

Common sense strategy in current market scenario

In these circumstances, any common sense strategy is likely to work well for the long-term. If you stick to a plan and view the bearishness as an opportunity, this market will reward systematic investment.

Here are some possibilities:

• Pick a Nifty index fund and invest systematically, assuming a 20 per cent CAGR in EPS over a 3-year timeframe. In terms of 2010-11 EPS, the forward PE is 11. You can wait with confidence for returns in the range of 15-20 per cent.
  
  
• Pick the 10 Nifty stocks offering the highest dividend yields and focus on accumulating these over the next two years. Take the dividends and re-invest. This will probably give a return a couple of percentage points higher than buying an index fund. This "Dogs of the Nifty" strategy operates on two fronts. The excess dividend yield (which is tax-free) boosts returns and eventually, the depressed scrips should bounce higher than the index itself offering excess capital gains.
  
  
• Create a mixed basket of midcaps and large-caps of not more than 10 stocks. Stick to two simple concepts. One is that they should have sustainable business models that you understand and find logical. Two is that valuations should not be higher than the current market PE of 13. Again, invest systematically. This portfolio should generate returns that are higher than the index if you're a good stock-picker. But it also involves higher risks.
  
  
• Pick say, three diversified equity mutual funds that have given high returns over the past five years. Aggregate portfolios and pick 10 stocks with the highest combined weights. Buy and hold. Here you're hoping that the fund managers' stock-picking skills and consensus will offer safety. This will probably offer a return close to the Nifty.

1) Stick to larger, highly-liquid counters. Smallcaps lose the most value during bear markets and small businesses are most vulnerable to recessions. 

2) Keep a timeframe that extends at least 6 months into the next Lok Sabha's term. 

View every drop in the market as an opportunity.