Strange…. isn’t it?
You must be thinking that how a boring recurring deposit (RD) can help make money in stock markets?
Though it may seem a bit strange, the fact is that it can be done easily. All it requires is some common sense and a little patience.
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| Accumulating funds using RD |
Now lets reason out as to why this can be done and why it makes sense.
So, according to you, when is the best time to buy stocks?
You will say that when they are cheap. You can have your own meanings of cheap. We think that markets are cheap when they are trading in lower parts of PE range of 12 to 24, i.e., closer the index’s PE is to 12, cheaper it is. And we have a valid reason to believe that markets are cheap at such valuations. You can read more at Do Indian markets bounce off PE levels of 12 and 24? & A PE analysis of Indian markets. You can also check the current state of markets to know about market’a current valuations.
Once we are able to sensibly judge when the markets are cheap, it makes sense to buy stocks of great companies at cheap levels. It is the concept of buying low and selling high (though we personally prefer not to sell if we have bought a stock really cheap).
So, now you want to buy stocks. But how do you fund it? Either you have a stash of extra cash which is waiting to be deployed. Or you can just crib over the missed opportunity. You know markets are cheap and you have the courage to go out and buy stocks. But you don’t have the cash. How much unluckier can a long term investor get. 🙁
But this fate is avoidable.
Its a given fact that markets will move up and down. So suppose markets today are trading at expensive valuations. Knowing that markets are supreme and you are just an average investor, you have opted for systematic investments in mutual funds. But you also know that a time will come, when stocks would be available at really cheap valuations. This thought should act as a trigger for you to start a simple recurring deposit. This RD would keep accumulating money, month after month. And don’t forget, this RD earns interest too.
Now suppose after 2-3 years, there is a market crash and stocks are available at really low prices. This is the time when you can use the money accumulated in RD to buy large quantities of great stocks, at really cheap prices.
It is as simple as that.
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| How to use RDs to make money in Stock Markets |
Personal Example – The author still regrets that in mid 2009, with stocks available at throwaway prices, he could not purchase them in big numbers and wasted a good crisis.
Out of the trio of three Cs : CASH & COURAGE in CRISIS, the author desperately missed the first one.
Moral of the story
You cannot control the CRISIS.
COURAGE is also optional and situational. You will only know you are courageous when crisis is round the corner. So, in a way, even courage cannot be controlled.
But as far as CASH is concerned, if you plan well, you can accumulate cash to create a war chest to be deployed when markets crash. You then have the ability to buy stocks which you were waiting to buy in the next market crash.
What do you think?
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Or we can just invest a lumpsum (if we have one ) in a debt or liquid fund..any particular advantages of an RD over these options othen than we can invest monthly sums?
I suggest you provide quantitative analysis for the above scenario. For example, include the years/months of crash and investment donein RD, short term deposits, short term liquid funds prior to X year/months before crash. Also the post crash rally and returns will complete the whole picture.
How will you detect a market crash … I mean crash by how much % will turn into a CRISIS situation ? In 2009 market didnt crash in a week … Hope you got my point.
Monitor the price-volume action. When prices keep on falling and then for a few weeks the volumes are at all time low – it will signal that people have given up on stocks, then scoop down. Or other way could be to buy looking at P/E levels. Buy at levels below historic levels. In either of the strategy, stagger the buying over a few weeks.
@Nishanth Muralidhar
If one has lumpsum money, there is nothing better than that. Otherwise, you can also go for the debt or liquid funds.
@Atul
That would take a lot of effort on our part 🙂
We would see if it can be done or it is better to divert our efforts to finding more qualitative concepts of wealth building 🙂
@Som
We would define a crisis when indices are trading at very low PEs (~12 to 15) and similar numbers for other multiples like P/BV & Dividend Yield.
Crisis in individual stocks needs to be evaluated on a case to case basis.
@anon.coder
Interesting. 🙂
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@Prabhu
Amazing work Prabhu 🙂
Even we are waiting to buy stocks in next market crash 🙂