There are tons of mutual funds and large hedge funds out there, where their main motive is to beat the index returns with less volatility. From retail investors to large fund house, everyone is working towards that. But the large institutions have huge resources and data to come up with certain strategies to generate better returns than index.
How does a retail investor can also make better returns than index with lesser volatility?
Consider a year like 2008, where Nifty itself crashed more than -52% and many other mid cap and small cap stocks have lost more than 70–80% in that year alone. Any investor, who sees their fund value going down more than half, would never step back into the markets again. Everyone wants small cap returns with large cap draw down.
Here’s the Nifty Bees yearly returns since 2008. One lakh invested in the index in year 2008 would have grown to 2.3 lacs by end of 2019. That’s around 130% returns with a CAGR of 7.3%. But this return comes with a huge draw down of more than -52% in the year 2008 when world market crashed.
Even though markets move up in the long run and we make positive returns, it comes with huge volatility. It’s really hard for any normal investor to hold their investments after seeing such huge drop in the fund value.
What if we can make a similar returns but with least risk, bringing down the volatility to a greater extent?
Instead of investing only in Equity, if we could diversify into different asset classes, we can generate similar returns with less volatility. So let’s consider investing in Equity, Gold and Fixed Income.
Let’s see what’s the historical returns of each asset class.
And liquid bees generates around 6% per year on an average. Combining all these instruments will generate a well diversified portfolio. Thanks to my trader friend Vishal Mehta who suggested me this diversified allocation during one of our weekend discussions.
Since we have ETF for all these three asset classes, it’s much easier for us to diversify. All we have to do is invest in the following ETFs
1. Nifty Bees (17.5%)
2. Nifty Junior Bees (17.5%)
3. Gold Bees (35%)
4. Liquid Bees(30%)
Consider you have 1 lac capital, then invest Rs.17,500 in Nifty Bees, another Rs.17,500 in Junior Bees, Rs.35,000 in Goldbees and Rs.30,000 in Liquidbees.
If we followed the above diversified allocation from 2008 to 2019, One lakh invested in the portfolio in year 2008 would have grown to around 2.32 lacs by end of 2019, the returns are almost same as investing in equity only, but we achieved this returns with least drawdown, the max loss we faced was only -10%, during the global financial crisis in 2008, when the whole market tanked, this portfolio lost just -10% only. And rest all the years; portfolio generated positive returns year after year.
With investing only in Equity, our risk exposure are very high, bringing in Gold bees will offset some of the losses we might face during hard times in equity markets, and liquid bees should generate fixed constant returns year after year, having nifty bees and junior bees in our portfolio helps us to capture the economic growth.
By following the above approach, it is much simpler for any retail investors to generate better returns with least draw down.
source: squareoff.in historical data