Want To Earn Alpha During Market High? Here Is How You Can Achieve It... - Outside View by PersonalFN

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Want To Earn Alpha During Market High? Here Is How You Can Achieve It...
Dec 12, 2019

The Sensex is ending the year on a high note, despite being volatile for most part of the year. The index has been trading above the 40,000 mark for close to a month without any major slide.

The encouraging Q2 corporate results, hopes of US-China trade deal, softening crude oil prices, and sustained buying in some of the index heavyweights along with hopes of further economic reforms were some of the factors that lifted the market.

It is noteworthy that the rally in benchmark indices may not always mirror on your mutual fund portfolio. Some schemes may underperform their benchmark index even during market high.

[Read: Mutual Fund Portfolio Under Performing During A Market High? Here's What To Do...]

This makes it important to invest in well-managed funds that can efficiently utilise the opportunities during market high and generate alpha for investors.

Most of the actively managed diversified equity funds primarily aim to generate alpha by not mirroring the index. However, not all funds are successful. In fact, in the last few years generating alpha has been a real challenge for most of the active fund managers.

When a fund generates alpha, it means more returns for the investors at a reasonable level of risk, cohesive with its investment style and strategy.

An alpha fundamentally depends on the expertise and ability of the fund manager in taking the right call at the right time and reward investors, irrespective of the market's movement.

--- Advertisement ---
From X to 2X: How to Double Your Income in the Long Run

How would you like to potentially double your income...

– Without working longer hours
– Without asking your boss for a raise
– And without even cutting expenses

What if we said this was achievable...over the long run?

Our Co-Head of Research, Rahul Shah, recently shared his latest strategy with a small group of readers...it is a way to potentially double one's income in the long run.

Rahul has put down a note explaining, step by step, how this strategy works, how it beats conventional investments, and how readers like you can use it to potentially generate an additional source of income.

Click here to read Rahul's detailed note on his strategy.
------------------------------

Points to remember...

As the economy is currently facing weakness, the on-going rally is not broad based and is only being led by a handful of stocks. Unless there is growth in consumption demand, rise in employment rate and improvement in manufacturing and agricultural output, most stocks may continue to be under pressure.

But on the brighter side, the government has taken various measures to revive the slumping economy back to health. Moreover, the RBI has cut policy rate by 135 bps so far in the current calendar year to boost growth.

When these measures start to show results many stocks across market capitalisation are likely to benefit. Thus, there may be many more opportunities to generate alpha going forward.

Are valuations favourable?

While the Sensex and Nifty 50 have been rising in the current year, the slowdown in economy has gravely impacted smaller size companies.

Graph: Valuation in large and mid-cap space

The P/E of Nifty 50 is currently trading around 28x mark, while Nifty Midcap 100 is trading around 24x. As we can see in the chart above, while the large caps continue to trade higher, the mid-caps have sharply corrected, making it a good entry point for fund managers to pick quality stocks.

This provides a window of opportunity for investors, who can handle short-term volatility, to step up their equity exposure. In due course of time, the broader markets may bounce back and reward investors for their patience.

Mistakes to avoid during market high

a. Redeeming investment

Often investors tend to book profits when the markets rise. But, by doing so you may forego any potential growth in the future, thereby limiting the opportunities to earn higher alpha.

Furthermore, untimely redemption can prove to be a hurdle in realising your targeted financial goals as per the time horizon you set. Redeem your investments only if:

  • You have achieved your desired corpus for a financial goal.
  • The scheme underperforms consistently.
  • The fund objective changes.
  • The fund risk profile changes.
  • In case of a financial emergency.

b. Ignoring asset allocation

While mid-caps are expected to grow in the coming years, one must remember that they are highly risky. Therefore, stick to your personalised asset allocation regardless of market condition to avoid taking undue risk. Invest in mid and small cap funds only if you can bear short-term underperformance and volatility.

c. No proper research

You may be tempted to add more number of schemes to your portfolio swayed by the optimism in the equity market. However, investing in a large number of schemes can do more harm than good. Invest in schemes only after evaluating your needs, financial goals, risk appetite, and investment horizon. Select the schemes that fare well on quantitative and qualitative parameters as compared to its benchmark and category peers.

[Read: The Special Care to Select the Best Mutual Funds in 2020]

Going forward, bouts of high volatility cannot be ruled out and patience of several investors could be tested. In volatile times, it is important to continue investing through the systematic investment plan (SIP) mode.

If you wish to multiply your investment returns in the volatile times through equity mutual funds and build an alpha portfolio, make sure you have an investment time horizon of at least 5-7 years.

Volatility is the very nature of the equity market. It's how we use it to our advantage, perceive the situation sensibly, and devise an efficient strategy that decides our investment success. SIP is a worthy mode of investing that will help mitigate the risk involved with its rupee-cost averaging feature while you endeavour to compound your hard-earned money.

However, remember that selecting schemes prudently will play a crucial role even when you decide to SIP into mutual funds.

At PersonalFN, our latest S.M.A.R.T. Alpha Score Model helps us identify the Alpha funds. We call these funds `winners amongst the winners'; these are ones that make rest of the winners shy of their performance.

The current market scenario is a great time to invest in equity through some well-managed high alpha generating funds.

Editor's Note:

To find the best funds with high alpha generating potential, we have developed a 'SMART Alpha Score' model. It has an additional categoriser on top of our popular 'SMART Score' process.

With optimum weightage to each parameter, which we consider important in identifying fundamentally strong funds with the potential to generate alpha, this model helps us zero in on quality names that have the ability to trump the benchmark and generate alpha returns for its long term investors.

And in our latest exclusive - The Alpha Funds Report - 2019, we have identified five high alpha generating funds selected through PersonalFN's special 'SMART Alpha' methodology.

Happy Investing!

Author: Divya Grover

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Want To Earn Alpha During Market High? Here Is How You Can Achieve It...". Click here!

  

More Views on News

This Man Is Worried, So He Just Started Buying Stocks (The 5 Minute Wrapup)

Jan 29, 2020

He had pledged never to touch stocks in his life but now...

Get Your Portfolio Budget-Ready! Here's What to Do... (Profit Hunter)

Jan 29, 2020

The Union Budget is simply a blip - be a value investor and you will have a great investing future. I believe one smallcap is all set for a sharp rebound - learn more here.

Which Trade Will Make More Money for You: Going Long or Going Short? (Fast Profits Daily)

Jan 29, 2020

There are two kinds of trades in the market: long and short. Which one is better?

Budget 2020: Measures That Can Provide Relief to Senior Citizens (Outside View)

Jan 28, 2020

PersonalFN explains what the senior citizens expect from the Budget 2020.

50% Profit in 18 Months: More Rebirth of India Gains Coming Soon (The 5 Minute Wrapup)

Jan 28, 2020

The gains in Mahanagar Gas is just the beginning of more upside to come in many other stocks.

More Views on News

Most Popular

How to Buy the Best Safe Stocks in 2020 (The 5 Minute Wrapup)

Jan 17, 2020

Don't fall for the safe stocks narrative going around in the stock market these days.

For 1,000%+ Gains, Follow the 8-Year Cycle in the Stock Market (Fast Profits Daily)

Jan 17, 2020

This is how the biggest trading profits are made.

The Best Asset Class to Invest in 2020 (Fast Profits Daily)

Jan 24, 2020

Why I'm most bullish on this asset class above all else in 2020.

Small is Beautiful in 2020 (A Prediction You Don't Want to Miss) (Profit Hunter)

Jan 17, 2020

As always Apurva will predict the best asset class to invest in in the coming year, last year he predicted gold and he was bang on! And this year he predicts... wait, you have to read to find out! Don't miss this.

The Smallcap Rebound Has Begun (13 Stocks Up Over 20% in the last Month) (Profit Hunter)

Jan 21, 2020

The best smallcap stocks to bet on to get rich in this market rebound.

More

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get our special report, Secret to Increasing Your Trading Profits Today Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Jan 29, 2020 11:01 AM

MARKET STATS