Following buy and hold strategy? Here’s where you should invest

To the average person, it may seem that to make money in the equity market (be it via stocks or equity mutual fund schemes) one will have to keep an active tab on the movements of the stock market, buy and sell frequently, and be on a constant lookout for the next big opportunity to make worthwhile investments.

While all this may look like must-dos for investing, it involves a lot of effort, time, and cost. Despite all this, there is no guarantee that this strategy will work in generating long-term wealth.

Instead, a retail investor can adopt a simple buy-and-hold strategy to build wealth in the long term. Here is how one can go about it.

What is a buy-and-hold strategy?

To better understand a buy-and-hold strategy, let’s look at how an actively-managed strategy works in a mutual fund scheme. Actively managed mutual funds look at beating the index that they have benchmarked themselves against. There is frequent buying and selling of stocks as per their reading of the markets. This requires them to be in tune with the market ups and downs and also about various stocks that they could pick.

A buy and hold strategy (also known as passive investing) belongs to the other end of the spectrum, where the funds buy and hold a certain basket of stocks over a long time without frequent transactions or changes to the basket.

How to adopt a buy-and-hold strategy?

An index like the Sensex or Nifty50 is considered the barometer of the country’s stock market performance. Indices are a basket of well-performing, financially sound companies picked from key sectors of the economy like information technology, finance, FMCG, oil & gas, consumer durables, etc. Currently (as of September 2021) both Sensex and Nifty have stocks from the 13 best performing sectors of the economy.

So, a buy and hold strategy, advocates buying and holding the index stocks over a long time to build wealth. Passive investing is based on the premise that a market works efficiently and delivers long-term returns by buying and holding the investments.

Performance of buy-and-hold strategy

Index funds backed by the Sensex have given an average return of 14.37% as against a benchmark return of 15.67% for a 10-year period. Nifty 50 backed index funds returned 14.16%, as against the index’s return of 15.41%% during the same period. During the similar period, average returns of actively managed funds with Sensex as its benchmark was 13.6% and those benchmarked to Nifty 50 was 15.28%.

The returns shown here are calculated on regular plans of index mutual funds. Direct plans of mutual funds (introduced in 2013) are those plans which are bought directly from the Asset Management Companies without the involvement of a distributor/agent. These plans are available at a much lower expense ratio as no commissions are paid out to the distributors/agents from the Total Expense Ratio and therefore, better replicates the index returns.

On the other hand, SPIVA, the S&P Indices Vs Active Funds…