Have you ever thought why mutual funds always say that “Never try to predict the markets …, Always invest for long term…, Stay invested…., SIP …. Invest every month….invest, invest, and invest…”
The answer is simple - they make money only when you invest. The more you invest the more fees they generate.
They claim to have products for all kind of markets, if markets are good, invest in mid cap/large cap/pure equity, if markets are bad, invest in balanced, arbitrage…. Fact is that, equity mutual funds make money only when markets are in a secular up trend. When markets fall, all equity/hybrid funds lose money. And if you are a SIP investor and markets enter an extended down trend, it will be a big psychological (as well as financial) pain for you every month.
Coming back to the topic, one thing is sure, mutual funds cannot make money for you in at least next two years as the markets have entered an overbought state from where they can only go down till they come to reasonable valuations and growth opportunities re-emerge. This blog has been warning to exit from equities when Nifty was 10900.
To understand the gravity of the current situation, just look at cement sector, the largest company, Ultratech, is trading at a PE of 43! A commodity sector, that used to trade at PE of under ten, is 4x costly, and without any comparable performance in last few years when it started shooting up. Its revenue has grown by a paltry 5.8% over past five years.
Nifty Midcap 50 is at abnormally high PE level of 55, and Nifty Smallcap 50 is astronomically high at 102! These are not at all sustainable levels.
Inflation is not expected to come down on high crude prices (see previous article), interest rates will remain elevated, and so debt market is also not expected to give you good return.
Gold is showing high volatility. Invest only after consulting experts with proven track record.
There are different ways to make money in this scenario, one may choose what suits his portfolio size and risk taking abilities.
You need to have a portfolio of at least Rs 15 lakhs to hedge it with derivatives, though a bigger portfolio can be more efficiently hedged. Hedging cannot be done by a fundamental analyst, it needs technical analysts with additional expertise in derivatives. Effectiveness depends purely on skills of person and may generate additional returns of 5-15% per month to compensate loss in portfolio. It may need some cash in your portfolio. It may even cause additional loss of 5-15% also if not done properly.
So if you lose say 6% on your portfolio in a month, and make 8% from hedging, then there is a net 2% gain that month.
No need to worry about falling markets. If you sell call options, you earn in falling markets, and by selling put options, you gain in rising markets. Selling options you can earn in earn 3-6% per month with a downside risk of 2-4% loss per month. This can work in all market conditions, depending on skills of person doing it. It needs at least Rs 5 lakhs funds.
Check our returns from selling Nifty options, based on our Market Signals - Click here for details
This is not for the faint-hearted; all the capital can be wiped out in one month. The only way to make consistent money in this high risk high return segment is to follow a proven trading system/ algorithm. For starters, this is a sort of higher state of technical analysis where the system builder invents a set of rules such that on fulfillment of certain conditions, a buy/sell signal is generated.
You may read this article to know more about this topic.
It can generate 10-30% per month. We generated 40.5% in three weeks after starting actual trading at MCX to build a track record (account statements and other details can be seen here).
You can contact me with your requirements.
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