What Works on Dalal Street

In the past year-plus (January 2014 -February 2015), the Nifty has given a return of roughly 41 per cent. It was at around 6,300 in early January 2014, and it closed at around 8,900 on February 28. Let's assume that an investor is looking at various ways to try and maximise returns from this bull run. A passive buy-and-hold position taken in early January 2014 in an index fund or ETF would pick up about 41 per cent. An SIP across those 14 months would have yielded an average (not annualised) return of 21 per cent for the entire corpus. If we look at the fiscal year (April 2014-Feb 2015), then the eleven-month return is about 32 per cent, with the SIP returning an averaged 15 per cent across this period. The NDA government took charge in mid-May. The return since the election results is about 33 per cent. In practical terms, an investor may wonder how to receive a high proportion of this theoretical index return without taking excessive risks or spending much time. There are several ways in which investors or traders could reasonably deploy corpus. A discussion of the pros and cons of different methods may be useful. Returns month by month MonthReturn#MonthReturn#01/01/201441.2601/08/201417.0901/02/201448.3201/09/201410.8901/03/201443.0801/10/201412.0401/04/201432.4501/11/20146.9401/05/201432.9701/12/20144.0401/06/201420.9101/01/20157.4601/07/2014 12:00:00 AM A passive buy-and-hold investor who only invests large lump sums once in a while is taking a big risk. He may be buying at a temporary market peak, for example. Also, if he is accumulating savings over a long period in order to invest the lump sums every so often, where does he park those savings in between equity investments? That is a big practical problem with the 'bullet method' of making occasional big investments. In a smooth uptrend, we would expect the return, month by month, to decline steadily as the time period gets shorter. But equity returns are always somewhat volatile. A lump sum invested in February 2014 actually returns more than the same invested in January 2014. In annualised terms, January 2015 gives better returns than February 2015. Apart from lump sum buy and hold, we must consider the returns that an SIP investor will receive. In effect, since the SIP is being averaged across every month, the varying volatility will even out over time. There will be times when the SIP is invested at a high price and yields less. There will also be times when the SIP is made after a market correction and yields more. SIP and buy & hold returns PeriodReturn (%)B&H 14 months41.26B&H 11 months32.45SIP 14 months21.09SIP 11 months14.78 As we know, this is a tried-and-tested method of ensuring stock market exposure with a decent return. The real advantage of an SIP is most apparent over the long term (when th

This article was originally published on May 08, 2015.