Establishing or setting investment policy begins with asset allocation amongst the major asset classes available in the capital market. Which range from equities, debt, fixed income securities, real estate, foreign securities to currencies. This may also be understood as the establishing of investment policy begins with the allocation of the financial resource amongst the major asset classes available in the capital market. Which range from equities, debt, fixed income securities, real estate, foreign securities and currencies, commodities, amongst others.
While establishing the investment policy the constraints of the environment and that of the investor have to be kept in perspective.
The environment would include: government rules and regulations (or restrictions); another would be the operating system of the market place. Individual constraints would include financial capability, availability of time to undertake the exercise, risk profile and the level of understanding the investor has of the investment environment.
From the perspective of the individual investor, it would be more a matter of strategy and tactics while engaging directly with the investment environment through the various markets he may have access to; and would include the stock market amongst other markets both regional and global.
It would be quite in order to present a sample investment policy for further analysis and modification to suit the requirements of individual investors. The investment policy would revolve around aspects of strategy and tactics.
Sample Investment Policy:
1. The cash assets under management would be strategically allocated in ratio 75:25 between stocks and bonds, respectively. The total cash assets being ₹1,00,000/=, it would be an allocation of ₹75,000/= towards stocks and ₹25,000/= towards bonds.
2. The cash assets allocated towards stocks would be called the operational resource; and would be tactically applied (or invested) in a ratio of 85:15 in select stocks traded in the stock market. This would ensure that there would always be a balance of 15% of the operational resource available in the investment account, when fully deployed (or invested). On other occasions the reverse may occur, when 85% of the operational resource would be available in the investment account with a 15% deployment (or investment) in stocks yet to be sold.
3. Investments would only be done in the Top 100 and Midcap 50 stocks.
1. Select stocks would be engaged only when it is our measured assessment that their current market price is below its intrinsic value and offer a fair margin of safety. This would require a study of the balance sheet, profit and loss accounts and cash flow statements of the preceding 5 years with a 3 year projection into the future keeping the growth rate as a constant. Specific reference and regard would be given to the sales and PAT growth; and to the EPS, EPS growth and the relevant P/E multiplier.
2. Technical analysis would also be done to confirm that the select stocks at their current market prices are at oversold levels and below while engaging them; and are at overbought levels and above while disengaging from them.
Sample Engagement of stock positions:
1. Select stock positions would be engaged as the stock price continues to move down. The engagement or purchase of stocks would be done in pyramid formation of M, L1, L2 and L3. The downward price differential between M, L1, L2 and L3 would be 2.5% to 3.0%; where M would be the confirmation of the oversold condition of the select stocks.
2. Further, the investment unit would be the monetary value and multiples thereof; which would result in a larger number of shares being purchased at lower price levels. This would be done with the primary purpose of bringing down the holding cost of the stock positions engaged.
3. Stock positions would be engaged and built upon only as the price moves down. No purchases would be made when there is an intermediate upswing in price. In case of an unanticipated price reversal, the stock position would be available for disengagement as is at higher price levels.
Sample Holding of stock positions:
The holding period of the stock positions engaged would be 3 to 4 months, to enable the turnover of the operational resource 4 to 3 times in a given financial year. Further, stock positions would be held till such time that the current market prices of stock positions held are at or above their intrinsic value and a technical analysis overbought condition is not visible.
Sample Disengagement of stock positions:
1. The disengagement of stock positions held would be initiated when the current market prices are above their intrinsic value; offer no margin of safety; a technical analysis overbought condition is visible and reasonable profits are available.
2. The disengagement or sale of stock positions would be done in reverse pyramid formation; in the sequence L3, L2, L1 and M as the prices move up. The upward price differential between L3, L2, L1 and M would be 2.5% to 3.0%; where L3 would be the confirmation of the overbought condition of the select stocks.
3. Stock positions would be disengaged and reduced only as the price moves up. No sale would be made when there is an intermediate downswing in price. In case of an unanticipated price reversal, the stock position or its remainder would be available for disengagement on the subsequent up move in price.As a word of caution and a disclaimer of sorts, the investor must appreciate that the above documented sample investment policy, is but a sample. The investor would be required to document his own investment policy; and subsequently analyze and appreciate whether he has been able to conform or abide by his stated investment policy. It would be fair to say that the establishing of, monitoring and subsequent analysis and revalidation of the investment policy against real time investment results is a dynamic process.