We have recently discussed the revival in investor interest in Nifty Next 50 – Nifty Next 50 outshines Nifty 50 by 41% – Time to buy? As pointed out, in 2018, many investors started investing in Nifty Next 50 index funds only to be frustrated by its performance over the next five to six years. Over the last year or so, the index has done well again, and as usual, investors are interested again. Here are some lessons from the episode.
1. All stock market predictions, suggestions, and investment decisions can be proved wrong or right if we wait long enough. No choice or strategy excels or underperforms all the time. Everything is a cycle with unknown repetition frequency.
2. (Almost) No one has the patience to endure these cycles. At the first sight of underperformance, they get jittery and want to invest in something else shiny.
3. After they invest, that shiny object begins to fade, and they look for something else shiny (including old choices). Shiny object syndrome is extremely injurious to portfolio health.
4. Recent underperformance or recent outperformance is the worst metric on which to base investment decisions. Yet, if you visit personal finance forums, it is clearly the only metric used. RIP financial literacy.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Past Performance Is Not Indicative Of Future Returns. Almost no one takes the disclaimer seriously. It should be the first thing they consider!
5. “Those who cannot remember the past are condemned to repeat it.” – George Santayana. This resurgence of Nifty Next 50 is nothing new. It has happened many times before. Meaning it has gone through poor phases many times before. If we do not appreciate the risk of using rolling returns, we will be surprised when the wind changes direction. See Nifty vs Nifty Next 50 vs Nifty Midcap 150 vs Nifty Smallcap 250: Return Comparison April 2024. Also, Watch my talk on active vs passive investing in India.
6. Everyone wants a diversified portfolio, but no one understands what it entails: Some investment or the other will underperform at any given time.
We are not too enthusiastic about this resurgence in Nifty Next 50. It will not last long. That is its nature. Only those who understand this and can stay invested through long periods of underperformance should choose the index.
So what should investors do? Besides avoiding the pitfalls mentioned above, Implement a goal-based investment strategy.
- Understand when you need the money. If you are unclear, you can only save, not invest.
- Know when to invest in what asset class: equity, fixed-income gold, etc. We recommend zero per cent equity for up to five-year investment durations, About 20%-25% for up to 10-year durations, and 50-60% beyond that. The rest is to be invested in fixed income. There is no need for gold or real estate (as an investment).
- Have reasonable post-tax return expectations from each asset class. For example, expecting 18% from equity is silly, no matter how long the investment duration is and how good the portfolio management is. We recommend 10% post-tax from equity and 6% post-tax from fixed-income. These expectations should only be revised downwards in future!
- Choose the right asset allocation. This means deciding to hold X% or Y% of equity so that (a) you can tolerate the volatility and (b) the amount of money to be invested for this asset allocation is possible and manageable (including future increase investment).
- Rebalance your portfolio once a year, every year. Market volatility will increase or decrease the portfolio’s equity/fixed income percentage holding. Rebalancing is a way to reset the asset allocation to the desired one. See this video for more details.
- Change your asset allocation in a step-wise manner. Many people say unsubstantiated things like “reduce equity in the last three years, before you need money” and so on. You need to reduce equity a lot sooner!
Long term investors must have a solid systematic risk management plan by gradually de-risking their equity exposure. Our research – explained in the goal-based portfolio management course and incorporated into the freefincal robo advisor – shows that this has more than a reasonable chance of success regardless of market conditions. This is also explained here: do not expect returns from mutual fund SIPs! Do this instead!
- Shift focus from returns to the target corpus. Too much time and effort get wasted on worrying about returns. It is a lot easier if investors focus on the target corpus. This is a variable target due to inflation and other logistics. So, each year, we need to redo the goal planning calculation.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)