When investing in equities, dont forget the process

Written by Brijesh Damodaran | Updated: Apr 4 2014, 20:28pm hrs
ChinaWhen fear is pervasive and equity is considered as ?touch me not?, it is time to start investing actively
The Chinese year of horse 2014 has had the equity market in India galloping. New highs are being achieved and equity, as an asset class that was looked at with suspicion not too long ago, has again found favour. What has changed so dramatically over the last six months

Perception in short run, fundamentals in long run

While headline inflation has ebbed a bit, retail inflation is still not comfortable enough for the RBI governor to reduce rates. The market finds its own way and, as the adage goes, dont question the market. Legendary investors down the years have followed this rule and the legacy continues.

Investing style & process

When fear is pervasive and equity is considered as touch me not, it is time to start investing actively. At the end of the day, investing is a process, with asset allocation determining the philosophy. No wonder it is said that what matters is when you sell. Till such time, any loss/gain is on paper and unrealised. So, how do you go about investing and also ensure that you realise the gains

There is no right method for investing. Legendary investors have all had their own rules. Though Buffett learnt the ropes under Graham, his method of investing is different and tuned into the current needs. Interestingly, while Buffett invested only in the US markets in the early part of his investment journey, Sir John Templeton believed in diversification and had investments across the globe. And both were successful in their methods. So, make your own rules for investing and, more importantly, have faith in your rules.

Ringfence investments

The new highs in the equity markets have increased your portfolio value and you need to protect the gains. What could be the tools that you could use

Asset allocation: If your allocation towards equity is overweight, its time to book profits.

Targets hit: At the time of investment itself, you need to decide targets both to enter and exit. And you need to be devoid of emotions to take decisions when the targets have been met. There are experienced investors who move the targets, both stop-loss and profit booking. But again, they are experienced and are used to it.

Derivatives: This can be used to protect the trading profits in the short term if you believe the long-term outlook is positive. Derivatives have famously been associated as weapons of mass destruction, but if you do not understand the product and its use, be prepared for the effect.

In the current scenario, if your outlook on equity is positive, you could hedge your long-term equity portfolio and realise trading gains by using Nifty put options.

If the Nifty corrects and your portfolio beta resembles Nifty, the risk you have if the market goes upwards is only of the premium paid for the put option. If the market goes down, though the equity portfolio is under water, the premium paid will act and you could realise gains. So, either way, you have insured your portfolio by paying a risk premium.

Investors across the globe use the derivatives instrument as a risk tool too. It is recommended that you understand the derivatives tool, both options and futures and only after assessing the same, use this as a portfolio hedging mechanism.

The writer is founder & managing partner of Zeus WealthWays LLP