Personal Finance

Don’t shop for investment discounts

B Venkatesh | Updated on January 24, 2018 Published on March 29, 2015

Discounts won’t help you if you are trying to realise short-term gains



Like most individuals you may also like discounts. Psychologists have long contended that our brain lights up when we see discount offers, whether it is on electronic gadgets or clothes.

It turns out that our liking for discounts extends to investments too! Most of us get excited when prices decline from previous highs; many view such discounts as buying opportunities.

In this article, we discuss how you should respond to such perceived investment discounts in the light of the recent decline in the Nifty index.

Discount rules

Your response to investment discounts for your core portfolio should be different compared to your satellite portfolio. Consider your core portfolio. It is earmarked to accumulate wealth to meet a life goal such as buying a house. The objective is to invest monthly and not time the market. The purpose can be achieved by setting up a systematic investment plan on equity funds along with a recurring deposit in a bank. Instead of trying to time the market, rebalance your portfolio annually.

That is, once a year, calculate the returns on your portfolio. Let’s say the total return on your portfolio is more than the required annual return to achieve your goal. In that case, sell some of your equity fund units to realise gains in excess of the required return.

Invest around 60-75 per cent of this in fixed deposits. The balance 25-40 per cent can be reinvested in equity.

In such investments, you can take advantage of investments discounts. For example, if you generated ₹3 lakh from realised gains in excess of the required return, you can earmark ₹1.2 lakh for equity reinvestment. Invest this amount in three-five equal instalments whenever there are investment discounts.

It is preferable to make the first such reinvestment at a discount of at least 10 per cent. Your subsequent reinvestments can be at discounts of 5 per cent or more.

You may also choose to invest extra capital, over and above your regular systematic investment plans. Again, you can invest such capital when you spot discounts of 10 per cent or more.

What about satellite portfolio? Investment discounts are not necessarily good for your satellite portfolio! This portfolio is set up to take advantage of short-term price movements in the equity market.

An investment discount, therefore, may not always offer a buying opportunity. What if the market declines further in the near term? Your objective of profiting from short-term movements would then be defeated.

So what should you do? You should buy at discounts only if you believe that the market will climb higher in the near term. Otherwise, hold cash in your satellite portfolio till you find a buying opportunity.

Going by the objective of the satellite portfolio, it is better to buy an asset at a higher price and generate smaller profits in a shorter timeframe than to buy one at a discount and wait for it to generate profits over a longer time.

Consuming vs investing

There is an important difference between buying products for personal consumption and buying investment assets. Discounts are good when you’re buying for consumption, such as mobile phones or clothes.

But they are not necessarily good for investment assets, for they are related to what your perception of the asset’s value is.

You also have to find an investor to buy your investment asset at a higher price. So, beware of getting discounts for your satellite portfolio. If discounts are given due to general market decline, grab such offers for your core portfolio using the rules mentioned above.

The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in

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