PORTFOLIO MANAGEMENT: ACTIVE v/s PASSIVE

There was an Indian actor who, whenever someone would ask him, “How was your performance?” would reply, “Compared to whom”? The answer to today’s all pervasive question is the same. Is equity investing risky for the retail investor or can it be very profitable? Well, compared to what? The real issue is not whether the investor is retail or institutional, but whether the investments are for the long- or the short-term and what kind of common sense does he use for the actual choice of investments.

Realistically speaking, risk in the equity markets is a function of time. The longer the tenure over which you invest, the lesser the risk you take. The eternal secret to making money in the equity market is that one just has to ‘stay’ invested. But then that kind of portfolio management is a simple non involving ‘Passive Portfolio Management’ style in which one can never really capitalize the complete potential of his investment. This passive way which is adopted by 90% of wealth managers and banks worldwide will never give you more than 10%-15% annualized returns even if you are invested in the best of Mutual Funds. The key question here is “Is your Wealth Manager / Financial Advisor BOOKING YOUR PROFITS regularly” or is he just running after fresh business? If not then you are not capitalizing at all on the potential of a God gifted bull run. A bull run is when huge profits can and should be booked. Herein comes what is known as ‘Active Portfolio Management’ where your Mutual Funds’ profits are booked when they must be booked, hence you make profits in the range on 30%-50%.

To understand ‘Active Portfolio Management’ better let me share with you in simple terms what we did for our Mutual Fund Investors both Indian & NRIs in the year 2015. At Rising Investment Financials, our software has a very powerful feature called ‘client wise trigger setting’. For e.g. if you invest Rs. 1 lac, a manual entry is done to set a ‘profit booking’ target at a mutually agreed upon 30%. With this ‘Profit Booking Technology’, we booked between 30%-50% profits for our client’s portfolios in the year 2015. Here is how it was done: when the Indian Sensex crossed 28000 levels, our software started triggering pop-ups of our investors who had achieved their profit targets. Although all our clients worldwide can easily view their portfolios anytime online at http://www.RisingInvestment.com, they were immediately contacted and informed about the good news. The ‘Profit Booking’ process then involved switching the fund’s principal + profit made to a liquid fund (which is just a temporary parking space). 4 to 5 months later the correction happened which brought the Indian Sensex down to the levels of 22000. Once we got several confirmations from our team of market analysts that the market has bottomed out and is not plummeting any further, that principal amount plus the profit booked which was lying in the liquid fund was then moved back to the same equity mutual fund. This effort from our end is ‘Active Portfolio Management’: Booking your profits at a high level and re-entering at a low level. Hereby we converted the notional profit into real profit. This activity is not done every year but is surely done whenever the Bull Run opportunity presents itself.

Investors need to clarify what the definition of risk is and what is meant by loss and notional loss. Most of us feel dejected whenever the market value of our investment portfolio declines. Let us say we invest Rs. 10,000 and in just few months it becomes Rs. 20,000. Then, when it comes down to Rs. 15,000 we start complaining about risk because we’ve lost Rs.5,000. This is not a loss. Such volatility is part of the same investment that gives us the good returns to start with and which will yield more in the future.

If you define risk as volatility, then the stock markets will surely seem to be uncertain. But if risk is defined as the probability of suffering a loss over a long- term, then the risk is entirely controllable and mostly dependent on the quality of your investment decisions and that of your financial advisor. So how can you make sure that you make good investment decisions? Very easy, try to stay away from individual shares and ‘take the MUTUAL FUND route’ and leave it to someone with a public track record of being a good investor, which is your mutual fund manager.

An interesting example: Investing Rs.100/- in a mutual fund is like ordering for a thali in restaurant. You get 100 shares to own of Re 1each. There is a high probability that you will enjoy at least some part of it. Making it good value for money, whereas investing Rs.100/- in one stock is like calling for ‘one dish of Rs. 100/-‘. You will either like it or dislike it, making it a far riskier proposition to digest.

Let us dwell on this for a moment. When you get a serious illness, should you visit a doctor? Or should you declare yourself to be a ‘retail doctor’ and start treating yourself? Just because you have money to invest doesn’t mean that you have the requisite knowledge/qualification to invest any more that than having a disease means that you have the requisite qualification to cure yourself.

Equity investing is a highly specialized job that needs skills and training that only a few people posses. It does not go to say that this is an art that only professional fund managers have. There are many individual investors who are good at it and there many professional fund managers who are not as competent. However, it is very easy and foolish to convince yourself that you have what it takes to make good investments when the markets are crashing or booming.

The daily, hyperactive tracking of the Sensex creates an image that the equity markets are high- risk gamble where one must stake all at unknown odds to stand a chance of making money. And actually, if you are a short-term player that may well be true. However, if you are someone who has, over the years invested regularly in the top mutual funds with excellent track records (in bull & bear runs) and have adopted the ‘Active Portfolio management’ v/s the passive style, the Indian markets are almost the best way of getting much better returns than most other investment can yield.

A wise thing to understand is that with the long term Indian economic story being fundamentally intact, there is no better opportunity of a long term (more than 3-5 years) investor to ‘enter the investment markets’ than in a bear run.

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Rising Investment Financials

Mr. Humshad Charna has a rich work experience of previously working with Citibank & ICICI Prudential in New Delhi, post which he started his own Wealth Management firm: Rising Investment Financials wherein for the past 16 years he is managing over Rs. 260 crores of Investments in India’s Top Mutual Funds across over 800 families (NRI’s & Resident Indians)..

For Professional Investment advisory he can be contacted at: +91 9810375004.

E-mail: RisingInvestmentFinancials@gmail.com

Website: http://www.RisingInvestment.com

 

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