If the Market Falls, I Will Do This...

Hello friends. How are you doing out there? This is Vijay Bhambwani and in this video I want to record a game plan of mine that I would implement if and I'm using the word if, before you comment, just listen to the emphasis on the word if, the market was to correct deeply.

I am talking of a correction, not of a reversal, not yet. It's early days yet. I have said in my videos that I still don't think the markets are in a bubble. You can call the markets a bubble when the decline exceeds 20%. We have not yet declined that much. So any fall will only be a correction but the correction can be significant.

So in cases does it is better not just to expect it, but to have a game plan at hand ready. So what would I do? Feel free to disagree of course. What would I do if it all I saw on the markets correct. Where would I put my money? Or more importantly, my company's money, which again becomes a shareholders money? And why? More importantly, why? Consider this as a continuation of the video I recorded on fourth of January in this play list.

Dear Reader: If You Invest in Midcap Stocks, this is for You

I think it makes sense to buy the index when the market falls and falls significantly. As I record this video on a Wednesday morning, I am seeing that the Nifty has fallen more than 100 points, but I don't consider this as any severe fall. This is something that the Nifty falls or rises in a matter of a few minutes on a normal trading session. So this is not what I call a serious fall, and it is not something to start worrying about. So only a fall, which exceeds 500, 1,000 points, is where I would say that you need to start thinking about implementing this strategy.

I would start to buy the index, and the way of I would buy the index is not by buying calls or buying futures, but by buying ETFs. Now, the reason why I would buy ETFs. As you know, the index is nothing but a composition of the cumulative impact of shares that make up the index or as they are known in jargon, constituents of the index.

For example, that Nifty 50 is made of 50 stocks. The BSE 30 is made of 30 stocks. So when I buy the Nifty ETF, the exchange traded fund, there will be shares of those 50 companies exactly in the same proportion as they have weightage in the index. Where do you get the weightage? I will guide you. Go to the NSE's website. Put your mouse on the product link, you will have a drop down menu. Click on indices and you will get the weightages of these indexes.

Why must you look at these resources? For a simple reason that these weightages change from month to month. Now this is where the accounting trip or the accounting jugglery makes the index or the indices go up. I'm talking of investments not trading by the way. For trading, I prefer individual stocks, but for investing, I would say the index and I am gonna share a logic with you. So please bear with me.

Now, why would you want to care? Because these weightages are not constant. The way the weightages have been changed around by the Index Management committee both at the BSE and the NSE is, if a stock rises in price, its weightage is automatically increased in the next month, and the shuffling of the weightage is done once a month, at the end of the month.

So on 31st March or possibly maybe on first of April, you will get the weightages of March. On first of May, you will get the weightages of April. So they are reshuffled every month. Now, if the stock is rising in price its weightage will go up.

Now those of you who are quick thinking and know a little bit about mathematics will say, hey, Vijay, that means that the stock, which is heavy weighted and is rising, its weightage will go up so the Nifty will never fall much. That's precisely my point. That's the reason why the market refuses to fall in case you haven't understood it.

Now if you go back in time, earlier the weightages were a lot more passive. They were not shuffled around every month, and we followed the free float system of weightage, which of course, is still there but the shuffling has become a lot more frequent. When the Nifty or the Sensex weightages were determined, the way weightages were not change so often, which is why the markets used to fall and rise much.

Now that the weightage are dynamic and the companies who share prices are rising, it keeps the indices higher and stops them from falling because falling stocks' weightage is automatically reduced. Now, why would I not invest in the Nifty ETF when the dice is loaded against a decline? It makes sense.

Now the reason why I say ETF rather than futures and options is if I were to buy futures, there would be something called up cost of carry. Now the cost of carry means rollover cost. If I was holding long positions in the month of March and I still want to go long in April, I will first square up my long positions, go long in April and pay brokerage execution costs, STT etc, and, of course, the difference in price, which is the cost of carry or the basis.

Now this basis is something that I put up on Equitymaster's Telegram channel every day. In the last expiry, the basis of the Nifty jumped by over 100 points. So the bull who was carrying forward his long position from the previous month to this month would have paid Rs 100 only in the cost difference plus brokerage, plus STT etc.

If I were to take delivery of the ETF, it's a one-time expense, and it lies in my demat account, just like any equity share. The other thing is that the ETF is like a mutual fund, but of a passively managed category fund. Now mutual funds are of two types. Active management and passive management. Active management is where the fund manager keeps buying and selling stocks very, very frequently, maybe even daily if he feels like it. He might buy X stock. Sell Y stock. Buy A stock. Sell B stock, and there the fund is incurring a lot of execution expense.

But here, in a passive investment, passive managed fund, you are only going to shuffle your holdings when the weightages in the Nifty change. So at the most, the fund manager will be shuffling or trading once a month and paying fewer execution costs. Which is why the expense to fund ratio, of passive managed funds are lower than expense to fund ratio of active managed funds. So the index ETFs are a low cost option, a delivery option, a one-time expense where I can take delivery of the Nifty. Now here comes the punch line. Don't go away!

I have often told you that the biggest reliable indicator in the market is of vested interest. Who has a vested interest in what? Your job as a smart thinking trader is to follow the vested interests and let the big guys impact the prices. You merely follow suit. You're riding on their coattails. No shame. If it brings you money, by following somebody big enough, there is no shame in doing so and I am talking about the big boys, the biggest brother of them all. The government of India.

Five years ago, the assets under management of index ETFs was a mere Rs 7,000 crores. As of now, the index ETF assets under management has crossed two lakh crores. That's not all. Bear with me. The punch line is yet to come.

Now, qualitatively speaking, look at who owns most of the index ETFs. Now first of all, more than 60% of the index ETFs has its investments in the Nifty ETF. Less than 40% is in Bank Nifty ETF. The reason is not difficult to see. The Nifty 50 is a broader based index comprising of 50 stocks and therefore relatively more stable and therefore more liquid. So definitely approximately 60% of the assets in index are in Nifty 50 and less than 40% in the bank nifty.

Now who invests in these ETFs? You will laugh and smile with me when I say this. The biggest investors in the index especially the Nifty ETFs is the EPFO, Employee Provident Fund Organisation. These are central and state government employees whose retirement savings are invested in this ETF. I don't know about you but I think the Sakari babus are smart enough to take care of their wealth and see to it that it does not erode.

If these guys are putting their money on the Nifty, I think they know what to do and why. I am not yet to question them and the amount itself is not funny. More than two land crores. So it's not pocket change that they are exactly investing here.

Who else, along with the Employee Provident Fund Organisation invests here? Central government and state government employees, pension funds, some investment institutions like mutual funds, etc and the shocking part is that only 8% of the total assets under management of index ETFs are by individual retail investors like you and me.

This is so neglected by the retail guys that they are busy trying to trade in the market, make money one day, lose money the next day, come back frustrated and try again on day three, when all they could have done was ride on the coattails of big brother Mr Government of India, which is smart enough to know that it could have doubled its money from the low of March 2020 to January-February 2021 and invested straight away in the ETF.

So this is number one of my game plan when the market falls. Number two, you all know that I talk a lot about bonds and fixed income securities. I would raise my allocations to fixed income for two reasons.

Number one. It takes away money from the stock market during a decline, in which case I save myself from erosion even though it is notional and on paper, erosion in my wealth from equity.

Number two, I have a feeling that interest rates in this country, and not just in this country, but mostly in many parts of the world will try to be subdued or forced to be a lower by the central banks of the countries because today the biggest borrower in any a geographical region, is the government of that area.

Now because of the stimulus being given in the post covid pandemic, governments are big borrowers from the bond market, and they're hammering the yields so that they can borrow money at lower interest rates. So before interest rates fall any further, I would basically try to raise my stakes in the fixed income market.

Where would I put money? I'm a big fan follower of sovereign debt. Sovereign debt is loans taken either by the state government or the central government. I personally favour the central government for a simple reason that only the central government has the power to print currency. If it runs out of money to pay me for my bonds or my sovereign guaranteed other investment schemes, the government will simply print currency and keep the printing press working overtime and give me back my money.

Sure enough, inflation might mean that my money can buy fewer Coca Colas or fewer bread and fewer butter and cheese and eggs but at least I have my money back rather than you invest it in private mutual funds or debt funds and lose it all and to the likes of Franklin Templeton. So I am a big fan of sovereign debt, especially central government schemes.

These other two things that I would do when the markets are either coming down or look like they're threatening to come down. Index ETFs led by the Nifty 50 ETF and sovereign debt.

On this sombre note, I bid goodbye to you, not before reminding you to click like on this video, if you liked what you saw. Subscribe to my YouTube channel if you haven't already done so and click on the bell icon to receive instant alerts about fresh videos being put up about here.

In the comments section, do let me know what you think of this video. I love hearing from you, positive, negative, give me all kinds of feedback and friends, a reminder, I am coming to you on the third of April, Saturday 11 am to have a live Q&A session on gold and silver.

I'm sure that many of you are now worried about why gold and silver and going down. So join me at 11 am on 3rd April for this exciting online event. It's one of the first time that Equitymaster is doing a live event on YouTube. We would love to have you here. See you on 3rd April.

Take care. Bye. Thank you for watching.