Should I buy, sell or hold?   May 20, 2011

The pink papers along with the glamorous business channels create overt excitement while reporting and providing views on capital markets. While they are doing their job and increasing their TRPs (Target Rating Points), it is important for you too to do your job of prudent investing. Very often they (along with their experts) provide a view by identifying buy, sell or hold opportunities in various investment products. But while they do that you need to ensure that you don’t indulge in superfluous trading habits.

No we aren’t saying dumping a relevant question like – “should I buy, sell or hold?” altogether. No! We recognise them to be valid, but want you investors to recognise to which investment products they apply.

For stock investing they are absolutely relevant, because the price discovery in them is a function of several fundamental factors and thus given that mis-pricing can occur. Mis-pricing could be due to market perception of the respective companies fundamentals – be it profitability, valuations, business model, expansion plans etc. But again that doesn’t mean you revisit your investment (in respective stocks) due to some short-term news (either positive or negative) disseminating for the respective companies. Neither does it mean you get swayed by market sentiments. What is required is focus for long-term investing taking into account long-term prospects for the industry as well as the company.

While investing in mutual funds too asking the same question of “should I buy, sell or hold?” very often (as you do in stocks) is quite silly in our opinion. You need to recognise that mutual funds unlike stocks aren’t subject to very wild swing in their NAVs with each second passing by. The NAVs are less susceptible to a wild swing due to the in-built diversification benefit.

But then too we experience many investors asking questions like – “what’s the respective fund’s NAV?” before investing. Remember the NAV of fund just doesn’t matter –it is irrelevant! You cannot select winning mutual funds by ascertaining the NAV, nor can you measure the fund’s performance. This is because there are more parameters than just returns while analysing the fund’s performance. The performance of a fund is function of factors such as:

  • How well the fund manager manages the risk,
  • Which approach to investing fund manager follows (i.e. whether bottom-up or top-down)
  • What points fund manager takes into account while picking stock for his portfolio,
  • Sector concentration
  • Exposure to top-10 stocks in the portfolio
  • Experience of the fund manager (in fund management as well as equity research)

Moreover, one needs to recognise the fact that they are long-term wealth creating investment products, hence frequently reviewing them doesn’t make sense if you have done enough research and bought funds which follows strong investment systems and processes, and the one which meets your investment objectives as well.

Your mutual fund distributor / agent / relationship manger may instigate you to churn your portfolio often also, but before you jump and do what he says you need to ask following questions for you to make a wise decision.

  1. What is the risk associated with XYZ mutual fund scheme?
    Before investing in any mutual fund scheme it is advisable to first assess the risk (Standard Deviation) it exposes you to. At the same time it would worth knowing your own risk profile based on your age, income, responsibilities, nearness to goals, etc.

    Different schemes have different risk profiles depending upon their exposure to equity markets. Also, you should also know how much returns are generated by the scheme per unit of risk borne by you (as depicted by the Sharpe ratio).

  2. What is the fund’s management style?
    Fund houses have varying fund management styles and processes. Some pursue the individualistic style, where the fund manager has his own style of investing, rather than the preset investment process fixed by the mutual fund house. As opposed to this, there are mutual fund houses that pursue a team-based investment approach where the investment process holds influence over the individual. Our preference is for the team-based style of investing, since it is more stable and the mutual fund (and its investors) is not over-dependent on an individual.

  3. How has the mutual fund scheme performed across market cycles?
    It is important to know whether a mutual fund scheme is consistent in its performance. This consistency is brought out well when the scheme’s performance is compared across different market cycles (bull market cycles as well as bear market cycles).

Hopefully, you investors will now ask more prudent questions like the ones mentioned above whenever you invest in mutual funds and not the same silly old question, Should I Buy, Sell or Hold?

Add Comments

Jul 06, 2011

Haha, shouldn't you be chraingg for that kind of knowledge?!
Jul 08, 2011

Thank God! Someone with barnis speaks!