Updated on: June 21, 2021 ; Investments
Background:
We have covered 9 investment portfolio strategies so far. In the last article, we covered regular investments in an equal-weighted portfolio of stocks. We are going to cover regular investments in a marketcap-weighted portfolio of stocks in this article. So the construct of this article will remain the same as previous ones.
Portfolio selection:
This is exactly the same logic that we applied in the first three articles. Please click here to understand the portfolio selection criteria.
Methodology for regular investments in marketcap-weighted portfolio:
We will directly go into explaining the regular investment methodology. For detailed literature on the scenarios and concept of equal weights please read here.
We shortlist the same set of stocks as we did in the first case. Scenario 10a will have the first 5 stocks and scenario 10b will have all the 8 stocks.
- Reliance Industries
- Hindustan Unilever
- ITC
- Nestle India
- Tata Motors
- Hindalco
- Tata Steel
- Larsen & Toubro
In the regular investments in a marketcap-weighted portfolio, we invest 100,000 rupees every year at the end of March for 18 years. The investment starts in march 2003 and continues till March 2020. This makes the total investments = 18 lakhs. We finally evaluate the value of the investments in march 2021.
As this is a regular investment strategy in a marketcap-weighted portfolio, we divide 100,000 based on the investment value of each stock in the portoflio, at the end of March each year. This proportionate amount is then invested into each stock.
So in scenario 10a, we distribute 100,000 rupees across five stocks, and in scenario 10b, we do the same across eight stocks. There are no withdrawals or balancing of the portfolio during the whole investment period. So each stock gets a different investment amount each year depending on its investment value.
As, usual, we compare these two scenarios with the Sensex, where we invest 100,000 rupees at March end annually.
Let’s look at the numbers now.
Comparative study:
The three tables below show the final investment value of the amount invested in Sensex and the two scenarios.
The scenario tables also provide the stock wise break up of investment values.
The Sensex returned 4 times the investment value, which amounts to a CAGR of 13.29%
Scenario 10a gave 7+ times the investment value in returns which means a great CAGR of 19.50%
Even scenario 10b, gave an impressive return of 7.3 times at a CAGR of 18.73%
You can see for yourself how some stocks increased the value of your investments, whereas some others pulled it down.
But at an overall level, both the scenarios did well over the 18 years investment period. When compared to the previous study of an equal-weighted portfolio, this strategy has performed a little worse, but still, it has given very good returns over the index.
The 5 stock scenarios had done better than the 8 stocks at the end of 18 years. Let’s see if it has consistently been this way throughout these 18 years.
For the first 3 years, there was not much of a difference between the performance of the three portfolios. All three were equal contenders for the top spot till the start of 2006. The two scenarios take a lead over the Sensex only after this period. Compared to the previous study(equal-weighted) this is three years earlier.
So, the marketcap-weighted strategy seems to have a head start over the equal-weighted strategy for the same set of stocks in the initial years. But the equal-weighted strategy takes a lead in the end. Please keep in mind, that this lead may very well reverse in the upcoming years.
Consequently, scenario 10a and scenario 10b also seem to running close to each other for a very long period of time. It is only in the last few years that scenario 10a takes a noticable lead over scenario 10b.
So, regular investments in a marketcap-weighted portfolio, and an equal-weighted portfolio have their merits over a long investment time horizon. But the results will vary significantly based on the composition, investment time horizon, and point of evaluation.
Final remarks:
Like all the marketcap-weighted portfolio strategies studied so far, this one also seems to have an edge over Sensex or Index.
Again, the choice of stocks matters the most. This approach is similar to the SIP approach (annual investments instead of popular monthly investments). So, it will have all the usual risks associated with SIPs.
You will have to study different strategies and alter them based on your preferences and market conditions. These studies are just cursors and guides to show you the different styles. They will help you to choose your own.
Stay invested !!!