Backtesting a three stock portfolio: L&T, ITC, Axis Bank

Last Updated on

R. Balakrishnan is a person of great renown in the banking and financial services space.  He helped set up CRISIL and  the Malaysian credit bureau, was head of equity research at DSP Merrill Lynch, executive vice president of Edelweiss,  to name just a few. He is now an organic farmer, writes a blog and has a column at MoneyLife. More details about him can found at his farm website.

In an article titled, Investing in a concentrated ETF, he referred to the formation of an ETF with the stocks held by the Specified Undertaking of the Unit Trust of India (Suuti) such as ITC, Axis Bank and L&T.  More on the ETF here.

He considered an ETF in which one unit would comprise of one share of ITC, Axis Bank and L&T, as an option for those who wanted to get into direct equity but did not have the time and effort to do so.

The SUUTI ETF will have more shares as these three shares only constitute 31% of the portfolio.

In this post, I present the backtesting results of such a three stock portfolio (not necessarily an ETF) from Jan 2000.

Step 1

Use the Moneycontrol historical stock price downloader and get the stock prices of the three shares adjusted for dividends and splits.

Step 2

Get a list of common dates using a combination of Excels INDEX and MATCH functions.

three-stock-etf

The normalised movement of share prices. The y-axis is in log scale to show the evolution in the early stages clearly. L&T and ITC have moved up 15 times, while Axis bank, 75 times.  ITCs movement is not well correlated to the other two shares.

Step 3

Use the mutual fund account statement generator to obtain the monthly dates of purchase (SIP date: 3rd)

Step 4

We assume one share of the three stocks is purchased each month.  The SIP states on 3rd Jan 2000 and ends on 7th Oct 2014.

So on 7th Oct. the investor would hold 177 shares of each company.

total investment: 1.47 L

portfolio value: 3.87 L

CAGR: 20.92%

Brokerage charges, demat account charges have been neglected.  If that bothers you too much, reduce the above return by say, about 1%.

three-stock-etf-2Comparison with Franklin India Blue Chip

What if the investor had chosen a diversified large cap fund instead?

total investment: 1.47 L

portfolio value: 3.01 L

CAGR:  15.92%

Normalized movement of FIBCFs NAV and the total price of the three stocks.

three-stock-etf-3

Notice how volatile the 3-stock portfolio is compared to the fund NAV.

The standard deviation in monthly returns for the 3-stock portfolio is 39%. A good 30% larger than the corresponding number for FIBCF.

That is the trade-off when it comes to direct equity vs. mutual fund investing.

Higher returns (potential) but higher volatility (guaranteed!) in direct equity.

While Mr. Balakrishan’s idea is certainly a sound one (with the caveat that the past performance means nothing!), should an investor use direct equity to create wealth or mutual funds?

Unfortunately, direct equity is seen by many as a route to create wealth quickly. Unfortunate because for most people the direct equity route is like walking the tightrope over a chasm that separates an investor from financial freedom.

The alternative is a wider plank laid out over the chasm . Walking the plank (!) would take longer but it is significantly safer.

Perhaps the tightrope would get thicker down the line, with experience.  Perhaps not.

Now that is one risk that I am not willing to take. Simply because I don’t have to.

Do share if you found this useful

Create a "from start to finish" financial plan with this unique open-source robo advisory software template


 Don't like ads but want to support the site? Subscribe to the ad-free newsletter! 
You will get the full post-ad-free delivered to your inbox for Rs. 3000 a year. Follow this link to read the terms and sign up! 


About the Author M Pattabiraman author of freefincal.comM. Pattabiraman is the co-author of two books: You can be rich too with goal based investing and Gamechanger. “Pattu” as he is popularly known, publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis, including a robo advisory template for use by beginners. Contact information: freefincal {at} Gmail {dot} com He conducts free money management sessions for corporates (see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints.

Content Policy

Freefincal has original unbiased, conflict-of-interest-free,  topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policy Our website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.
Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media


Do check out my books


You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingMy first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.  It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantGamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

18 Comments

  1. but when u say LnT, itc, axis bank etf – u need to put in the amc costs no..? of course if u have ignored the dividend, i am assuming it will have the same impact as NOT including the amc costs

  2. but when u say LnT, itc, axis bank etf – u need to put in the amc costs no..? of course if u have ignored the dividend, i am assuming it will have the same impact as NOT including the amc costs

Leave a Reply

Your email address will not be published. Required fields are marked *