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It has been seven months since I started lazy stock investing. These are five stock portfolios based on NSE indices. Their current status is reported in this post. Three of them are based on smart beta (active + passive) indices and two on a passive index. The main aim is to find out how effective a lazy investing stock picking strategy is.
There are two important warnings.
I have no skin in the game. These are purely imaginary portfolios created at Value Research. I have nothing to lose here. If the portfolios work, I will write a post about it. If they fail, I will write a post about it.
These are NOT stock recommendations. They are experimental portfolios and I am running a test. I invite you to study them with me. Do not put your money based on these posts alone. Please carry out due diligence.
Readers may be aware that I have been covering Nifty active and passive index performance from time. Although I recommend index investing (in Nifty Next 50) only for less than 25-year-olds, many readers of all age groups have taken to it. If you are just joining in, I strongly recommend that you read the following posts before proceeding
Watch my talk on index investing: Can we get higher returns with lower risk?
List of Index Mutual Funds and ETFs in India: What to choose and what to avoid
Can I start Index investing with 50% Nifty 50 and 50% Nifty Next 50?
List of funds that have outperformed Nifty 200 & Nifty Midcap 150 Total Return Indices
Index Investing: advantages and disadvantages of being a passive investor
How new stock investors can quickly start investing using NIFTY Multi-Factor Indices
Are Nifty Smart Beta (strategic) Indices better than the Nifty Next 50?
Warning! Nifty Next 50 is NOT a large-cap index!
Nifty 50 Equal Weight Index vs Nifty 50: Does equal weight result in more returns?
Nifty Next 50: The Benchmark Index That No Mutual Fund Would Touch?!
What is the best way to invest in Nifty Next 50 Index?
Let us dive into the five test portfolios
Test Portfolio Rules
1: Check the monthly list of stocks for each index from the NSE website
2: If current stocks in the test portfolio are part of the index, buy one stock of each.
3: If current stocks in the test portfolio have been removed from the index, sell it and buy the same no of stocks +1 appropriately. For example, the changes in the Nifty Next 50 for this month are shown below. JSW Steel has been removed from the top of the index. So I sold those 4 stocks and (test) purchased Lupin instead (a new entry). Then added one more stock of Lupin (4+1) for this months quota. In the tables below, stocks in red have been sold and stock have in blue are new entries.
4: The portfolio will always have 10 stocks only. The STCG or LTCG paid will be accounted for at the end of each FY.
5: The portfolio will be updated each month.
6: The holdings shown as “zero” represent stocks that have now been sold.
Pros: Stock selection is trivial as long as you do not mind the price at which you buy. The stocks from the strategic indices are solid names and I believe are a good buy at any price.
Cons: As pointed out by readers before, because I chose to buy one stock each, the weights are imbalanced in favour of some stocks. I am in two minds whether to correct this or not. I would advise against follow this kind of strategy in real life as it increases concentration risk.
Test portfolio 1: Ten stocks from the top of Nifty Next 50
The Nifty Next 50 (NN50) is the bottom 50 of the top 100 stocks arranged by market cap. So we get the index weights and after a bit of processing end up with this table. Notice the huge difference in market cap as we go down the index. A literal reason why I keep saying NN50 is not a large-cap index.
Why top 10? I see it as a lower risk, lower reward variant of the NN50.
Test Stock Portfolio 2: Ten stocks from the bottom of Nifty Next 50
The idea here is to have a mid-capish portfolio with higher risk and possibly higher reward than the NN50.
Test stock Portfolio 3: Ten stocks from NIFTY 100 Low-Volatility 30
This picks the 30 least volatile stocks from the NIfty top 100 index. We started with the top 10 in June 2018 and will follow the same rules as above.
Why? Same reason as above. It is quite possible that this portfolio will have significant overlap with the Top ten from Low Vol 50
Test Stock Portfolio 4: Ten stocks from NIFTY Alpha Quality Value Low-Volatility 30
NIFTY Alpha Quality Value Low-Volatility 30 Index consists of 30 stocks selected from NIFTY 100 and NIFTY Midcap 50 and reflects the performance of a portfolio of stocks selected based on
the top combination of Alpha, Quality, Value and Low-Volatility. You can read more about its performance in the links above.
Why? Best of all worlds – Growth investing + Value investing + low volatility.
Test Stock Portfolio 5: Ten stocks from Nifty Low Volatility 50
The NIfty Low Volatility 50 is a set of 50 stocks (from top 300 stocks by market cap) with least fluctuations in monthly returns considered over the last one year period (trailing). So in June 2018, I looked at the monthly factsheet and invested in the top 10 stocks (one stock each) by weight (least volatile stocks occupies more weight).
Why? Because choosing low volatility stocks is a simple, yet rewarding way to beat market cap based indices at lower risk (see links above).
So the plan now is to keep updating this and see how it goes. These test portfolios essentially focus on the stock selection and not the portfolio build (as that is terribly overweight)
About the Author
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. since Aug 2006. Connect with him via Twitter or Linkedin
Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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Interesting work. Would it be possible for you to do this with historical data?
how do you select top 10 from the group of index stocks ? … is the selection is based on top 10 market cap or top 10 gainers of last 9 months or any other criteria ?”