For most things in life, we plan how we want to execute investment strategies. There is a certain method or process that we generally follow to arrive at the best possible outcome. In general, strategising any task helps us go through the process with more ease. If well-executed, strategies prepare you for how to deal with any undesirable outcome along the way. The benefits of planning investments are similar.
One of the most well-recognised benefits of investing, as opposed to simply saving, is that it becomes an essential tool for fighting inflation, while its compounding impact, especially in equities, can be a big help in meeting financial goals.
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Like most things in life, though, investing cannot be viewed with a ‘one-size-fits-all’ approach. Your financial standing, risk appetite, age, responsibilities, and growth ambitions are some of the many factors considered when deciding how you should pursue your journey of investing. In short, your investment strategy is what matters.
To start with, let us divide investing into two broad buckets: active and passive investing. Let us understand each of these in further detail:
Active Management
Simply put, this style of managing money entails trying to better the returns of your portfolio as compared to a certain benchmark. This is done through a combination of stock picking and trying to time the market with the background of the larger macroeconomic situation. Fund managers generally command a certain premium for this kind of money management as compared to a passive investment style.
Strategies in Active Management
Dynamic Asset Allocation
- The idea of this strategy is to invest across asset classes or securities in a manner that can yield the maximum returns, using a combination of fundamental and technical analysis. This style generally does not involve following asset allocation strictly, as it could hinder the investor from capitalizing on profitable trends.
Tactical Asset Allocation
- This style of investing involves reshuffling a portfolio to maintain your desired asset allocation. This typically involves booking profits in an asset class or security that has outperformed the rest of the portfolio and thus exceeded its initial weightage in the portfolio. Apart from preventing the portfolio from becoming skewed, taking partial profits also helps in minimising potential losses from that asset class or security.
Top-Down and Bottom-Up Approach
- This is an extremely popular stock-picking strategy that involves selecting a stock in two different ways. A top-down approach entails research starting at a macroeconomic level, followed by an industry analysis, and then narrowing down to the shares of a company.
- In a bottom-up approach, the focus is on the company’s financials – including its cash flows, earnings growth potential, the strength of its balance sheet, etc., rather than the outlook for the broader stock market. In times of unfavourable conditions, such stocks are expected to outperform the broader market, backed by their robust fundamentals.
Value and Growth Investing
- A value investor looks for stocks that are undervalued. This means their current market price is lower than the intrinsic value that the investor believes the company has, offering it potential for appreciation in share price. Shares are often undervalued because of an overreaction to an adverse event for the company.
- A growth investor looks to invest in shares that offer higher growth potential compared to the broader market. Such companies often command a high premium and fall into the ‘high risk-high reward’ category.
Passive Management
A passive fund management style entails investing in well-researched ideas for the long term. The earnings and, consequently, share price trajectory of such companies are generally not very volatile. While it is subject to short-term fluctuations, over a longer period, it generally leads to steady gains. Some benefits of a passive style of investment include lower fund management fees, tax efficiency in the long run, and freedom from the need to constantly monitor markets for any changes.
Strategies in Passive Management
Buy and Hold
- The theory here is that one cannot always beat market returns, and hence, no changes are made to the investment even in periods of underperformance. This is done with the hope that in the long run, the security will be fairly valued, resulting in the expected gains.
Investing in Indices
- Also known as indexing, this strategy involves organizing your portfolio to mimic a particular index. This strategy involves only mirroring the returns made by the index and is fairly popular for large indices such as the Nifty 50 and Sensex.
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Using SIPs
- A Systematic Investment Plan (SIP) ensures that a fixed amount of funds is invested each month into the desired security, index, or asset class. This ensures investment discipline, the benefits of compounding in the long run, and rupee-cost averaging, which means that the same security, index, or asset class is bought at all levels, improving the average cost of the security per unit.
| Scheme Name | YTD | 1Y | 2Y | 3Y |
| UTI Nifty200 Momentum 30 Index Fund – Direct Plan – Growth | 28% | 76% | 43% | 28% |
| Aditya Birla Sun Life Nifty Midcap 150 Index Fund – Direct Plan – Growth | 28% | 76% | 43% | 28% |
| Motilal Oswal Nifty Midcap 150 Index Fund – Direct Plan – Growth | 15% | 59% | 38% | 27% |
| Nippon India Nifty Midcap 150 Index Fund – Direct Plan – Growth | 15% | 59% | 38% | 27% |
| Motilal Oswal Nifty Smallcap 250 Index Fund – Direct Plan – Growth | 15% | 59% | 38% | 27% |
| SBI Nifty Next 50 Index Fund – Direct Plan – Growth | 14% | 58% | 38% | 27% |
| Kotak Nifty Next 50 Index Fund – Direct Plan – Growth | 13% | 63% | 37% | 26% |
| DSP Nifty Next 50 Index Fund – Direct – Growth | 30% | 69% | 35% | 24% |
| LIC MF Nifty Next 50 Index Fund – Direct Plan – Growth | 29% | 68% | 36% | 23% |
| UTI Nifty Next 50 Index Fund – Direct Plan – Growth | 29% | 69% | 35% | 23% |
Here’s a SIP calculator that can help you choose your SIP.
Value Averaging
- Similar to rupee-cost averaging, this strategy involves buying more of the desired instrument when prices are lower and fewer at higher prices, aiming for a value-effective cost per unit. For this strategy to work well, investors should not be emotional or doubt their investment when prices decline.
Within the various strategies available for investing, you should choose what works best for you, irrespective of what may be popular. This can help you with your investments while potentially helping you reach your financial goals faster. Join Kuvera for all your investment needs and select mutual fund plans to help meet your goals.
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
Watch here: The Simple D.I.Y Investment Strategy for Beginner Investors
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