Context for investment strategies and markets
The 90/10 rule encourages passive investing, minimizing costs while maximizing long-term gains. Buffett trusts this strategy so much that he has incorporated it into his will for his family’s investments.
While this advice is grounded in the American economy, many are curious about its applicability in the Indian market. Financial experts weigh in on how Indian investors can adapt Buffett’s recommendations.
Impact: consumers, banks, economy
- Encourages passive investment strategies.
- Enhances long-term wealth creation with minimal costs.
- Supports financial literacy among Indian investors.
Adapting the 90/10 Strategy for Indian Investors
Experts suggest that while the core idea can be employed, modifications are essential for the Indian market. Vaqarjaved Khan, a Senior Fundamental Analyst at Angel One, notes that India’s equity market is less efficient than that of the US, leading to potentially more alpha opportunities.
Many experts believe the essence of Buffett’s strategy, which centers on passive investment and long-term growth, can certainly apply to Indian equity and debt markets.
Customizing the 90/10 Strategy
Khan recommends small adjustments to the original 90/10 strategy for Indian investors. He advises allocating 75% to a diversified index like Nifty 500, followed by 15% in large-cap or mid-cap active funds to extract additional value, and the final 10% in government securities for liquidity.
- Another option includes 60% to Nifty 50 or Sensex ETFs, 15% to large-cap or mid-cap funds, 15% to flexi-cap funds, and 10% in government securities.
- Focusing on local resources mirrors the spirit of Buffett’s strategy.
Advantages of the 90/10 investing strategy
One of the major benefits of the 90/10 strategy is its simplicity, making it accessible for retail investors. Khan emphasizes that no skill in stock picking is necessary, and low costs help fuel long-term gains.
- It encourages diversification across various market caps.
- Removes emotional biases during market fluctuations.
Kudva adds that the strategy’s main advantage lies in its ease of implementation and low expense ratios, leading to better compounding over time.
Challenges of the 90/10 strategy
However, experts caution about potential risks associated with this strategy in India. Khan highlights that India’s market depth is limited compared to the US, resulting in greater concentration risk.
Those nearing retirement or with shorter investment horizons might find a 90% equity allocation too aggressive, especially during market downturns.
Kudva reiterates that high equity allocation can lead to increased volatility, unsuited for investors who cannot withstand significant losses. While the strategy offers a chance to match market returns, it may not fulfill the needs of those seeking higher returns through riskier investment strategies.
In summary, Warren Buffett’s 90/10 rule offers valuable insights into passive investing. However, Indian investors should adapt this framework to suit local market conditions and their individual financial goals.
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Original source: www.livemint.com
