Equity Investment Strategies

A New Era in the Mutual Fund Industry: Introduction of Specialized Investment Funds (SIF) Key Provisions at a Glance Types of Investment Strategies A) Equity-Oriented 1. Equity Long-Short Fund – Min. 80% in equity, up to 25% short via derivatives. 2. Equity Ex-Top 100 Long-Short Fund – Min. 65% in mid- & small-caps, up to 25% short in non-large-cap stocks. 3. Sector Rotation Long-Short Fund – Min. 80% in up to 4 sectors, up to 25% short at the sector level. B) Debt-Oriented 1. Debt Long-Short Fund – Invests across debt instruments, allows short exposure via exchange-traded debt derivatives. Min. weekly redemption. 2. Sectoral Debt Long-Short Fund – Min. 2 sectors (max 75% in one), up to 25% short at the sector level. Weekly redemption. C) Hybrid Investment Strategies 1. Active Asset Allocator Long-Short Fund – Dynamic allocation (equity, debt, REITs/InVITs, commodities), up to 25% short exposure. Redemption: Twice a week. 2. Hybrid Long-Short Fund – Min. 25% in equity & debt, up to 25% short via derivatives. Redemption: Twice a week. Other Key Provisions 1. Minimum Investment Threshold – ₹10 lakh at PAN level (exempt for accredited investors). SIP, SWP, STP allowed but must meet the threshold. Active breaches not permitted; passive breaches allow only full redemption. 2. Investment Restrictions • Single Issuer Limits (Debt & Money Market): AAA: 20% | AA: 16% | A & Below: 12% of NAV. • Sector Limit: Max 25% of NAV per sector. 3. Subscription & Redemption – Open-ended, close-ended, or interval-based. Different subscription & redemption frequencies allowed (e.g., daily subscriptions, weekly redemptions). Notice period: Max 15 working days. 4. Listing of Units – Close-ended & interval funds must be listed on stock exchanges. Non-daily redemption funds classified as “Interval Investment Strategies.” 5. Benchmarking – • Equity: Benchmarked against Nifty, Sensex, BSE 100, CRISIL 500. • Debt: Benchmarked against suitable indices. 6. Distribution – Distributors must clear NISM Series-XIII: Common Derivatives Certification to sell SIFs. 7. Disclosure – • Offer documents must specify redemption rules, derivative exposure, and liquidity risks. • Portfolio disclosure every alternate month. • Scenario analysis showing potential losses. 8. Risk-Band System – 5 risk levels, reviewed monthly: 1. Lowest Risk 2. Risk Level 2 3. Risk Level 3 4. Risk Level 4 5. Highest Risk 9. Branding – SIFs to have distinct branding; AMC name can be included.

"Patience is a crucial but rare investment commodity”. Everyone like to think of themselves as a contrarian, but few actually act out contrarian principles in practice. One of the few is David Dreman. Through merging psychology with finance, Dreman was able to consistently beat the market for many decades with very simple strategies. Dreman's philosophy is based on the premise that investors systematically overprice the “best” stocks of the moment while underpricing the “worst” stocks. This is because investors tend to be overoptimistic in their forecasts for the “best” stocks and too pessimistic for the “worst” stocks. Over time, Dreman argues, both above- and below-average performance tends to revert to the mean due to earnings surprises and other fundamental factors, which results in the underperformance of the “best” stocks and outperformance of the “worst” stocks. Dreman's strategy consists of three main steps: 1️⃣ Rank stocks using a price ratio from highest to lowest and select those in the lowest quintile Investors should start by ranking the universe of stocks using price ratios by highest to lowest. The next step is to select the stocks from the lowest quintile – that is the 20% of stocks that rank lowest – which are exactly those with the best value prospects. 2️⃣ Buy medium to large-sized stocks Dreman believes these companies “are usually subject to less accounting gimmickry than smaller ones”, which provides extra protection to investors. Additionally, these companies “are more in the public eye” and share more “staying power”. 3️⃣ Diversify Dreman suggests 30 to 40 stocks, diversified among fifteen or so industries whenever possible. Funds should then be split in equal parts. He believes diversification is essential because the returns of individual stocks vary widely. Being a contrarian is not an easy investment approach. As the name suggests, adopting such a strategy means going against the crowd the majority of the time, which means going through long periods of underperformance. In his book, "Contrarian Investment Strategies: The Psychological Edge", Dreman claims that, while the overall market returned 11.6% per year between January 1970 and December 2010, the simple strategy of just picking low P/E companies would have returned 15.2%. Alternatively, picking the high P/E ratio companies would have returned 8.3%.

Amid ongoing market volatility, core equities are emerging as a compelling—and often overlooked—opportunity. While many investors have gravitated toward passive strategies, the nuanced potential of core equities, which blend characteristics of both growth and value, remains underappreciated. Actively managed core equity strategies can offer not only tactical upside but also important risk mitigation. Historically, they’ve exhibited lower volatility than pure growth or value styles, providing a steadier ride through market cycles. As economic uncertainty persists, revisiting core equities could be key to enhancing portfolio resilience, diversification, and long-term performance. Read more in our weekly Quick Takes on Capital Markets.

How to Navigate Stock Investments in 2025: A Strategy for Retail Investors As we enter 2025, the global equity markets present both challenges and opportunities. Retail investors must now navigate this complex landscape with a strategic, informed approach to maximise returns and minimise risks. Overview of the Current Market Landscape Global Equity Trends: Equities are entering a phase of moderate growth after a substantial rally since late 2023, with a projected return of around 10% in 2025. This growth is expected to be driven by earnings rather than valuation expansion. Valuation Challenges: U.S. equity valuations remain historically high, with risks of overvaluation concentrated in mega-cap stocks. However, opportunities exist in geographic and sectoral diversification. Technology Dominance and AI Growth: Technology remains a key driver, especially AI-related stocks. While current valuations are not in a bubble, diversification into secondary beneficiaries of AI is recommended. Investment Themes for 2025 Diversification is Key: Sectoral Diversification: Focus on a mix of growth, value, and defensive sectors to balance risks. Emerging opportunities in sectors like healthcare, automation, and education tied to demographic trends can be lucrative. Geographical Diversification: While the U.S. remains a core market, consider exposure to under appreciated regions like Asia-Pacific and parts of Europe. Focus on Earnings-Driven Growth: Stocks with a solid track record of earnings growth, especially outside the technology giants, are likely to provide better risk-adjusted returns . Pay attention to companies improving operational efficiencies or innovating within established industries. Harnessing AI and Automation: Invest selectively in AI enablers like semiconductor companies and infrastructure providers. Explore opportunities in industries disrupted by AI and robotics, such as logistics, manufacturing, and even creative services. Risks to Watch Policy and Macro Risks: Geopolitical shifts, particularly around tariffs and trade policies, could impact global growth. Fiscal imbalances and shifts in monetary policy may create volatility. Over concentration Risks: Avoid over-reliance on a few dominant companies, as market corrections can disproportionately affect concentrated portfolios. Actionable Steps for Retail Investors Adopt a Barbell Strategy: Combine investments in high-growth stocks with stable, income-generating value stocks. Consider Thematic ETFs: Use ETFs targeting AI, automation, or emerging market opportunities for diversified exposure. Stay Informed and Flexible: Regularly review economic and sectoral trends. For instance, demographic shifts towards aging populations are likely to drive healthcare and reskilling opportunities.

Some top investing principles from studying Bill Ackman over the years. Read this carefully. Each word below is a key to his strategy. Focus on Quality Businesses: Invest in simple, predictable, cash-flow-generative companies with strong competitive advantages, high returns on capital, and minimal exposure to uncontrollable risks. Concentrated Portfolio: Maintain a focused portfolio of 10–20 high-conviction investments rather than over-diversifying. This allows deeper research and better management of each position, maximizing returns. Deep Research is Key: Conduct thorough fundamental analysis of a company’s financials, management, and industry before investing. Activist Investing for Change: Take large stakes in undervalued companies and if needed actively push for strategic or management changes to unlock value, (he did this in his Canadian Pacific Railway turnaround). Long-Term Perspective: Focus on long-term growth and fundamentals rather than short-term market fluctuations. Contrarian Thinking: Be willing to take unpopular or unconventional bets when research supports the thesis, such as his investment in General Growth Properties during its bankruptcy scare (his fund made $1.6 billion on a $60 million investment) Risk Management: Use hedging strategies and avoid over-leveraging to protect against market downturns. Ackman’s $2.6 billion gain from a $27 million hedge during COVID-19 exemplifies this. Cut Losses When Wrong: Acknowledge mistakes and exit losing positions rather than doubling down. Ackman’s prolonged Herbalife short was a lesson in accepting defeat sooner. Balance Confidence and Humility: Have strong conviction in your investment thesis but remain humble enough to learn from errors. Invest at Reasonable Prices: Buy undervalued stocks with a margin of safety to reduce risk. Ackman targets solid companies overlooked by the market for better entry points.