Ample research is available on the subject that speaks about the merits of staying invested in volatile markets, highlighting the negative impact of missing out on the best days of the market’s performance. On the other hand, these arguments find a counter in the analyses that show the advantages of staying out of the markets during periods of corrections.  

Both these analyses have limitations of using historical data. Therefore, it’s important to use these data points in conjunction with other important approaches to answer this holy grail of a question.

So, which are the best days to invest in the market?

Generally speaking, each answer to this question is different based on the context in which it is asked.

For instance, if you asked Google “the best days to invest in stock markets”, the first result will state that “Monday is the best day to invest in the market for traders”. On the other hand, the 6th result indicates that “Friday is the best day to invest in the markets for long-term investors”.

Hence, it is important that we first develop a good understanding of the various types of market participants so that we don’t use the term ‘investor’ loosely.  

Market Participants

1. Traders

2. Speculators

3. Investors

Traders participate in the equity market with an intention to benefit from volatility. Days with high volatility are the best days for them to trade.  

Speculators participate to benefit from favourable outcomes of specific events. They prefer investment periods lined up with uncertain events.

Investors invest money for the long term with an intention to achieve specific financial goals. They abide by a financial plan and deploy money accordingly. For these investors, the best days to invest in the market are those that are outlined by their financial plans and their investment time horizon.

With this context in mind, let’s answer ‘what is the best time to invest’ question through three approaches – Historical Data, Human Psyche and Probability Analyses.

Historical data

Let’s assume you had invested Rs. 100 in the Nifty on 1st April, 1995 and had stayed invested till today (across all ~6500 trading days). The value of this investment, as on today, would be Rs. 1325 (implying a CAGR of 10.5%).

During this time period, there were ~3450 days with positive returns. If you, as an investor, had stayed out on 7 of the best days of the market (1% of the total trading days), this investment would have grown to only Rs. 695 (implying a CAGR of 7.5%).

Therefore, based on the historical data approach, patience is key. Considering that we are talking about the long-term investor, just being present on the good days is enough, since we can’t always predict the market.

Human Psyche

For this approach, let us try analysing the psychological emotions an investor goes through in his/ her investment lifecycle.

It’s generally difficult for an investor to invest in the falling market than the rising market.

Maximum participation (from retail investors) in equity markets come during the bull markets. During this market phase, the general atmosphere of the economy is positive and we realise greater investment activity. Conversely, bearish markets increase investor skepticism and make them extremely tentative about investing. This behaviour is also reflected through the changes in trading volumes during these market phases.

This doesn’t seem right, does it? Demand in the market increases (with higher prices) when it is performing well, while the demand falls (with cheaper assets) when the market is not performing?  

Well, this is how the human psyche influences our investing behaviour. Hence, for long-term investors, the best bet is to stick to their investment plans during volatile markets, while, at times, doubling down on strong fundamental investments which may be discounted during bear markets.

Probability Analyses

Probability weighted return calculations are an effective tool to compute expected outcomes from an asset class which has multiple probable return trajectories. This analysis can help us understand the expected return from an instrument, say, the NIFTY over a specific time period.

Let’s take an example to understand how this approach can help us answer the key question. 

For the sake of this discussion, let’s assume that an investor (as defined earlier) is looking to invest in the Nifty ETF for 10 years. The Nifty today is at 15,000 and is expected to be at 50,000 by 2031. This investor is deciding whether to invest in the Nifty today, or wait till it corrects and falls to a lower level.

Since, there is no certainty of a market correction, let’s assign probabilities to the Nifty level over the next 2 weeks:

– Nifty – 12,000; 50% (since the investor feel that this is a highly likely outcome)

– Nifty – 15,000; 20%

– Nifty – 18,000; 20%

– Nifty – 20,000; 10%

Now, if we consider the above-mentioned market levels and compute the probability weighted returns, what we see is that expected outcome is similar to the likely return from current market levels!

Wait, what?

Yes, the investor can expect to earn almost the same return over the next 10 years if he invests today (at 15,000) rather than delaying his decision by 2 weeks (13.3% v/s 12.8%). 

All these three approaches direct us to only one answer. For long term investors, it is best to get in early, systematically plan our investments over time and stay in through both, good days and bad.

One word of caution here though –

This approach might not work if you have certainty about futuristic market outcomes.

But let’s get real. If you truly knew what the market would do tomorrow, you would not be reading this post and neither would you be doing your jobs. You would’ve gone all out and invested all your wealth on that “certain” market outcome hoping to make a killing of a lifetime.

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‍Author: Vaibhav Porwal (Co-founder — dezerv.)

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Growing up in a traditional Marwari joint family with the business of textiles and plastic shoes, my world was all within a 10-km radius in Udaipur.

There are four landmarks which used to be most frequented by me and that is where I learnt early lessons of finance and investing.

1. Bada Bazar

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This is the commercial heart of the city. It is the hub of trading and retailing of agricultural, textile, handloom products and of money lending (or as we know it as P2P lending). I used to hang out there at our textile shop. Meeting people from all walks of life set the stage for me to understand human behaviour. That’s where I learnt the true nature of trade-offs. With higher risk came higher returns. And yet, everyone perceived this equation differently. Some would inherently seek out risk, and some would abhor it. I realised early on that finance is less about numbers and more about emotions.

Over the years, the quaint narrow lanes became traffic nightmares, and buyers moved on to shopping at malls. Most of the shop owners thought this was a fad, and stayed put. Eventually, many of them had to shut shop.

Lesson 1: Change is the only constant. As an investor, agility and dispassionate decision-making is the key.

2. Railway training ground

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Can you imagine a life without cricket? The Railway Training Ground (RTG) was that place where we would have some of the most passionately fought wars, also called matches. Interestingly, we were warned by folks to not go beyond the RTG as there were jungles beyond that.

Towards the late 80s, I remember many local brokers coming to our shop to talk about buying land beyond the RTG. Every once in a while we ended up going to the construction site nearby to fetch the ball. The opportunity was playing out right in front of our eyes. And yet, my family never considered investing. Today, we look back at it as a missed opportunity.

Lesson 2: Sometimes the investment opportunities we look for are right in front of our eyes.

3. Fatehsagar and Pichola Lakes

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No weekend was complete without a visit to the two lakes that defined Udaipur. Built hundreds of years ago to store water, these two lakes were central to the social life of the city. The roadside stalls there served up some of the best food I’ve ever had.

Little did we realise, that the introduction of private airlines & the consequent increase in tourism in the 90s would change the fortunes of this favourite picnic spot. While we always had some of the finest hotels in the country, the introduction of new air routes changed the landscape of the area with the opening up of new hotels around the lakes. This taught me an important lesson in investing.

Lesson 3: Always look out for the second and third order effects of change.

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4. Hindustan Zinc

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HZL was and still is, the largest company operating out of the city. Most of my friends’ parents worked at HZL. Hanging out at their homes, I realised one universal truth: almost every employee was very unhappy. It always amused me that despite being the largest producer of zinc in the country, it always struggled to make profits.

Soon with tremendous fanfare, and massive protests, HZL was privatized. Almost everyone we knew there opted for the voluntary retirement scheme. New management came in, and very soon, we started hearing about more jobs and happier employees. Thereafter, it felt that the fortunes of the company changed. It is this that brought home to me the importance of high-quality management in selecting investments.

Lesson 4: You’re always investing in the people, before you’re investing in the business.

Coming from a small town, I always had self-doubt about how I could go on to advising some of the wealthiest families in India. After all, they have seen and experienced much more than I had. Going back to my roots helped me believe in myself and carry forward the lessons I learnt in my professional life.

Author: Vaibhav Porwal (Co-founder — Dezerv)

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 It is a ritual for the family to put together a budget to plan monthly expenses and see the rising prices destabilize it. For most families, it is a vague concept that raises many questions:

1) Why are prices going up?

2) Who was increasing the prices?

3) Is there a way to manage this better?

Inflation in my formative years- The 90s‍

Between 1990 and 2000, average inflation in India was 9.5% p.a. This meant that you had to spend Rs. 248 in 2000, to buy the exact item that you spent Rs. 100 on, in 1990. Having lived this reality, I developed a better sense of this phenomenon called inflation. Fuel prices increased by 3x during this decade- from Rs. 10 per liter to almost Rs. 30 per liter.

What is Inflation? How does it impact our lives? 

Let’s divide this discussion into two parts:

I.  Focus on understanding the concept of inflation

II. Map the financial life of a typical family and the role that inflation plays

I. Deep dive into the concept of Inflation

Inflation is a rise in the prices of goods and services and we encounter it due to two factors: economic and lifestyle. Let’s understand both of them:

1. Economic factors

Cost-push inflation: Increase in prices due to rising input costs. For example, a sugar company increases prices as a result of rising sugarcane prices. 

Demand-pull inflation: When the supply of money exceeds the demand, the purchasing power of money falls and too much money starts chasing too few goods. We are witnessing it currently because during the covid crisis, all the central banks increased the money supply and that has led to the higher prices. 

2. Lifestyle factors

One under-acknowledged reason for inflation that affects our lives is on account of lifestyle changes.  As human beings, we constantly aspire to upgrade our lifestyle leading to an inadvertent increase in our expenses. While estimating expected inflation, it is important to factor this in. 

Make your savings work for you

We earn money through businesses or professions that we engage in and use it to buy goods, services, and assets. The residual amount is our savings that are stored to meet future planned and unplanned expenses. This cycle of earning and spending continues until  retirement. Unfortunately, the working life is finite, and expenses continue well beyond that. For this, we need to build our savings. In case the return generated on our savings is unable to keep pace with the inflation, it may reduce the ability to meet expenses.

In order to understand this better, we’ll closely map an individual’s financial journey below.

II. Mapping the financial journey

To understand the expenses, savings & portfolio growth patterns of an individual, we have assumed the following attributes to project finances across his/her lifespan:

1.Starts earning at the age of 24 yrs. with a yearly salary of Rs. 6 L, which grows by 9% every year

2.Retirement age – 60 yrs.; Life expectancy – 85 yrs

3.Personal milestones 

      a)Married at 28 yrs

      b)Two children are born- one at 30 yrs; the second at 32 yrs

      c)Home purchase at 40 years with an annual EMI (Equated Monthly Installment)  of Rs. 15L for          20 years

4.Economic inflation assumed at 5% p.a. & lifestyle inflation at 3% p.a.

5.Savings from salary, post expenses, grow 9% annually

Simulating these parameters, the financial portfolio of the individual will tentatively appear as below: 

Observations:

1.With expenses increasing year on year, the portfolio will grow till the age of 60 due to compounding & additional inflow of savings.

2.Expenses decrease at the age of 55 & 57 years, as we assume the children will now be    financially independent as they turn 25 years.

3.The impact of inflation increases with time as prices of goods grow and lifestyle improves

4.The corpus built till 60 years, will be utilized to generate expenses during retirement

With the above assumptions, the portfolio created will last till 85 years exact, meeting the life expectancy. However, any costs due to any other life events or unforeseen/medical events have not been accounted for.

In order to account for different circumstances, let’s create projections for different scenarios to understand the sustainability of portfolio returns:

The impact of inflation increases with time. Hence, it is critical to build portfolios that not only surpass economic inflation, but also cater to your lifestyle needs and help maintain them post-retirement. Additionally, a safety net should be built to have a substantial cushion, in case of any unforeseen event.

How can you construct a portfolio that beats inflation?

Moderate inflation keeps the engine of growth chugging and is considered healthy. However, it disproportionately impacts individuals who are moving towards the latter half of their lives and are dependent on their savings to meet expenses. 

To consistently beat inflation, a scientific asset allocation process should be embedded in the foundation of the portfolio. This allocation should be decided as per the individual’s long-term financial goals and aligned with his/her risk tolerance levels.

Let’s get an overview of these assets. 

Asset classes can be classified in 3 categories:  

1.Risk-free assets that typically generate returns less than inflation- 

  a.)GSECs (government securities)/ bank fixed deposits

2. Assets classes with positive correlation with high inflation

   b)Real estate and gold

3. Assets that are volatile in short term but beat inflation by significant margins in the long term

    c) Equities

It is important to design a portfolio with reasonable exposure to the asset classes that perform better than inflation and can maintain and increase the purchasing power of the investments. However, it is important to note that during differing market conditions, the instruments within each of these classes might generate different returns. 

In summary, inflation plays a significant role in management of finances and it is important to periodically measure its impact on the expenses and also to actively check whether your  investments are able to keep pace with that. In case there is a gap, investors should modify their investment mix to meet/beat the inflation impact.  

‍Author: Vaibhav Porwal (Co-founder — dezerv.)

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1.Defining actively managed funds and passive index funds

2.Drivers of alpha creation [alpha =higher returns than the benchmark]

3.Why has alpha disappeared in Indian equity mutual funds?

4.How should an investor decide on allocation between the two categories?  

1.Active and Index funds

A. Actively managed funds: As its name suggests, active investing requires someone to manage the security selection actively. The objective of active management is to generate higher returns (alpha) than the benchmark index. The fund managers managing these schemes believe that the markets are imperfect and that they can use these inefficiencies to generate superior returns. 

B. Passive/Index Funds: In contrast to actively managed funds, an index fund is a form of a passive mutual fund or exchange-traded fund designed to match an underlying index’s performance. Portfolios of index funds are adjusted corresponding to changes in benchmark indexes to maintain the alignment with their benchmarks. For example, an index fund on Nifty 50 will change its portfolio whenever there is any change in the Nifty 50 index. Proponents of index funds believe that markets are highly efficient and there is no possibility of alpha creation. 

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2. Drivers of alpha creation 

There are four distinct drivers of alpha creation:

A. Information asymmetry: If a fund manager has superior access to information that can influence the future price of the stocks, then he is likely to do better than the others.‍

B. Size: A smaller corpus allows the funds to be nimble in the approach and makes it conducive to invest money in companies with low liquidity. For instance, let’s say a fund manager wants to allocate to a company with a market cap of 4000cr and a public float of 1000cr. However, if this fund is large, they will not be able to make a sufficient allocation to the stock. ‍

C. Research Framework: A superior research framework may lead to a better financial projection of the underlying companies and, therefore, an excellent portfolio performance. Furthermore, a strategy with significantly divergent attributes relative to the benchmark, for example, a higher stock/sector concentration, may contribute to the alpha.‍

D. Behavioural attributes: A fund manager’s ability to dynamically align a fund’s portfolio with various economic scenarios is an essential behavioural attribute to generate alpha.     

These are the factors that contribute to the alpha generation and present arguments in favour of active investing. Now the obvious question is, “If these factors work, then why is alpha reducing?” Let’s try and understand this in the Indian context.

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3. Where has my alpha gone?

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Funds Outperformed by the Index(Based on Absolute Return)

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The above graph highlights how most active funds struggle to deliver alpha and how apparent their underperformance is relative to the benchmark. The reason lies in the reduced intensity of the factors that contribute to the alpha. These factors are explained below:- ‍

A. Reduced information asymmetry: Increased corporate disclosure requirements and lightning-quick dissemination of information due to social media are reducing information arbitrage and consequently making markets highly efficient.‍

B. Size: Corpus sizes of the actively managed funds have gone up significantly. Larger fund sizes affect the fund managers’ ability to be nimble, reducing their investable universe.‍

C. Increasing research coverage: The proliferation of multiple funds has significantly increased the stock research coverage, impacting fund managers’ ability to unearth unique stock ideas.        ‍

D. Regulatory changes: Regulators over time have reduced the flexibility for the fund managers by defining tight boundaries for funds. For instance, large-cap funds need to maintain a minimum of 80 per cent allocation in large-cap stocks. These changes have reduced the flexibility for the fund managers.

Other factors like higher flows in index funds from EPFO (Employees provident fund) and Global funds has created positive momentum for the index funds. However, even after understanding these factors, the big question remains, ‘Whether to invest in active funds or passive funds ?’ Let’s cover this in the next section. 

4. The allocation conundrum 

There is every reason for investors to be confused and feel unsure about their allocation decisions. To help simplify it, let’s divide the markets into two segments:

 A. Efficient segment: Large capital allocation, higher research coverage, and lower information asymmetry drive the efficiency of this segment. The top 100 stocks in India represent the efficient segment of the market. Given the efficiency of this segment, it’s better to participate in this segment through passively managed index funds. 

 B. Under-discovered segment: There is a large universe outside the top 100 stocks where institutional participation is low. It results in high price inefficiency and low research coverage. However, active funds focusing on this segment can generate significant alpha.  These active funds include multi-cap, Flexi,- cap, mid-cap, and small-cap funds.

In a nutshell

Investors should not think of allocation decisions as active or passive decisions. In fact, over the long term, a combination of active and passive will deliver superior returns. 

Allocation decisions can be made by following the below steps:‍

1.Decide on allocation preference– Split between Large-cap and  Mid-cap.‍

2. Identification of the fund managers – Basis the allocation, choose the funds in each bucket with a consistent track record for an extended period.‍

3. Periodic review– It is essential to periodically review the consistency of the fund’s portfolio with the investment objectives. 

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Author: Vaibhav Porwal (Co-founder — dezerv.)

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This is a personal blog.

As a wealth manager it’s really hard to talk about yourself. So this will take some stepping out of the comfort zone. But 2021 is the year of leaving many such comforts, so this will be worth it too!

The Beginning

Anusmaran (the annual IIMB alum reunion) of 2006 was a special one. This one, at Sea Princess Mumbai is where I actually met Karan Bhagat, though we’d been at the same office at Kotak Wealth since ’05. From that chance meeting to later working alongside him, in ’06 and ’07, I actually figured what the fuss was all about – this was the smartest guy in the business! So, in late 2007, when we discussed the early ideas of what would become IIFL Wealth, the decision had already been made.

We look back at our lives and think of defining moments – and most of them are personal: the move to a new city, the wedding, the birth of your children. Rarely, does a new job count – and yet, the first day at work at IIFLW is right up there. IIFLW checked all the boxes on what is seductive about the startup journey:

✅  Extremely high motivation, energy and fun (no one personifying this better than Yatin Shah!)

✅  Learning from the smartest co-workers

✅  Doing stuff that had not been done before

✅  Putting up your hand and getting responsibilities beyond your years

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We’re Different

There aren’t many places where a 27 year old newbie is allowed to launch the first product idea (h/t to the Deutsche team for taking the leap!), set up 5 new offices and (later) build one of the largest fee based multi-asset portfolio managers. There was a seat at the table for anyone who wanted to step up.

Today, 13 years later, looking back at this incredible journey of the most successful new wealth business in the country, it’s natural to wonder what made it work. To me, the standout ingredient: the people. At the top, the energy emanated from the most positive and optimistic leaders in Nirmal and Venkat. And in the team, we managed to attract, retain and motivate the most unique combination of individuals – some of whom had never worked in this industry before.

Here, I’ve been exceptionally fortunate. In my own reportees, I’ve found friends, mentors, advisors, coaches and the best drinking buddies. Without actually knowing it they were helping me feel my way around. The legendary parties at Indus, Hitchki and our offsites often tested our biology but we survived, to turn up to work the next day with the same gusto as on the dance floor.  Their sheer persistence, each day, every day is inspirational.

The other unfair advantage is the opportunity to work for the smartest people in the country. Entrepreneurs, professionals, innovators – each at the top of their game. Their attention to detail and discernment ensure that we do our best work each day. Their charisma and optimism motivate us to be better people. To top it, we get paid for learning from them!

Even the way we dealt with lows was also unique. Analyse what went wrong, don’t pass the blame around, and don’t repeat the mistakes. And always, look at the brighter side. The positive attitude and attention to detail was a masterclass in handling failure.

This culture, along with the motto of continuous innovation, are what set IIFLW apart. In fact, unknown to us, we were not only creating a new business, we were shaping the industry. Thanks to IIFLW, the clients and the industry are better off for having more choices, newer processes and superior talent.

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This is the true inspiration we derive from the journey we have been on. Not just improving the financial lives of our clients, but also setting a benchmark for the industry is the true north. A benchmark that improves the offering for everyone.

Partners in crime

There’s something else IIFLW helped me find – my co-founders! The three of us couldn’t be more different, and yet at IIFLW we found an umbrella to flourish under. As peers, we have had our intense competitions, and yet when the curtains closed, we ended up being friends with tremendous respect for each other. For Sahil, Vaibhav and me, this forms the foundation of the way forward.

Entrepreneurship is crazy, but it’s crazier still when it takes leaving IIFLW. But does IIFLW really leave you? I would think not.

Stay tuned for more from the team at dezerv.

Author : Sandeep Jethwani

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