Introducing All Weather Investing smallcase - smallcase (2024)

In India, the rate of increase in the prices of goods and services has always been very high as compared to the returns generated by the money invested in bank fixed deposits and other traditional products. Thus, anybody using only such investment products is actually becoming poorer instead of building wealth. So, what is the solution?

Stocks? Yes, if you don’t need that money in the next 3–5 years and are willing to ignore the near term fluctuations. But what if you need to liquidate your investment due to some emergency and the stock markets are at a low?

Real Estate, Gold and other alternative investments have their own peculiar problems. It is always extremely difficult to sell a house or land when you immediately need money. Gold is more of a wealth protector than wealth builder. On top of that, it is extremely difficult to manage physical gold.

The need for all weather, low cost investment instrument

The above discussed factors convinced us regarding the need for a product which would suit the needs of first time investors and fulfill the following objectives :

• Provides exposure to equity instruments offering significantly higher returns compared to returns of traditional bank instruments like FD/RD. This provides investors the benefit of stock market participation.
• Is suitable for investment regardless of stock market mood. Investors need not worry about timing their investments and exits.
• Should significantly reduce the fluctuation in portfolio value and provide a smooth wealth creation journey.
• Is based on exchange traded funds (ETF) to ensure low cost structure

Constituents

ETFs are financial instruments that track a particular index, commodity, or a group of stocks. It trades on the exchange – just like stocks. For example, the Nifty Index consists of 50 stocks. So if one wants to invest in the Nifty index, one can just buy the Nifty ETF, instead of buying all the 50 stocks in the same proportion as the Index. If the Nifty generates a return of 5%, the Nifty ETF will also generate approximately the same returns. Similarly, investing in a gold ETF will allow investors to earn the returns of investing in physical gold.

ETF instruments are passively managed vehicles, as they follow a certain index or theme and need not take calls on selective companies. Hence their expense ratios are low compared to mutual funds.

Furthermore, ETFs can also be bought and sold via broking platforms with the click of a button, making investing in them very easy. These factors together tilted the scale in favor of creating a product using ETFs.

After confirming that the below ETFs have sufficient liquidity they were included in the All Weather Investing smallcase.

Asset allocation strategy

After identifying the constituents, the next step was to build an algorithm that decides how much money should go into each asset class. Our research team studied many algorithms and went ahead with an algorithm that maximizes the Sharpe Ratio of the portfolio.

The Sharpe Ratio calculates the excess returns generated per unit of risk. If we are given two investment products (portfolios, stocks, asset classes) and asked to pick one of them for investment, the best way is to pick the one with the higher sharpe ratio. Higher sharpe means that the product generates more return without taking extra risks

After conducting multiple studies, writing numerous computer programs and running 1000s of simulations, we were able to generate an algorithm that can efficiently distribute your money in the selected asset classes. A computer program will run the algorithm every quarter to decide the optimal weighting scheme as per the prevailing market conditions.

Conclusion

The All Weather Investing smallcase provides the optimum asset allocation mix for long-term wealth creation. This smallcase is ideal for all types of market conditions. It will ensure that neither will your investment ship sink, nor will the investment flight soar to scary heights. What you will get here is a steady ride to help you meet your long-term investment goals.

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy/sell any security or financial products.Users must make their own investment decisions based on their specific investment objective and financial position and using such independent advisors as they believe necessary.

Windmill Capital Team: Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures pagehere.