Is Holding Cash A Good Idea in Current Indian Markets?

An investor’s life is tough. And most of the times, it is because of cash. He is either short of cash when he wants to invest; or he has too much of it when he should not invest.
Either way, ready-to-be-deployed-cash can become an investor’s biggest friend or an enemy.
 
So with markets ripe with predictions of coming bull market and expected rise in markets after the general elections, does it make sense to hold cash in current markets?
 
Note – Before we go ahead, please be informed that Indian large cap indices are currently trading at multiples close to 19, which I personally do not consider to be cheap.
 
So let’s go ahead…           
 
The main purpose of holding cash now (or whenever) is to be able to buy shares at reduced prices.
 
(Note – I am not referring to mutual fund SIPs here. These should be continued irrespective of market fluctuations if you intend to invest for decades and not years.)
 
Now suppose I believe in the business model of IDFC and want to buy its shares at reduced prices. So I hold cash in case share prices of IDFC go down.
 
So is holding this cash a good idea? Will it be beneficial in the long run?
 
It depends.
 
Either I hold cash, or I don’t hold cash.
 
Either share prices of IDFC go up, or they go down.
 
There are only 4 possible outcomes:
  • I hold cash, IDFC goes down: I get to buy shares of IDFC at reduced prices. (I win)
  • I hold cash, IDFC goes up: I generate little return on held cash*, and I lose out on (notional) capital gains. (I don’t win)
  • I don’t hold cash, IDFC goes down: I have a (notional) capital loss. (I don’t win)
  • I don’t hold cash, IDFC goes up: I have a (paper) capital gain. (I don’t lose)
Cash Indian Stock Markets
Now I can only control whether I am holding cash or not. But I cannot control the markets, i.e. IDFC’s share prices.
 
One might say that probability of share prices going higher in future is more as the company has a sound business model. But at the end of the day, its only probability and we cannot control it.
 
So effectively, neither I nor anyone else knows the probability of IDFC’s share prices going up in future. And without knowing these probabilities, there is no way to know whether the decision to hold cash in current markets is a good one or not.
 
I have myself advocated the concept of holding or rather accumulating cash in Recurring Deposits and using it when stock markets are down. But though it does seem to be a sensible approach, there is no way to predict its success.
 
So it’s always a good idea to question your own assumptions and decisions. What are your thoughts?
Are you holding cash now waiting for stock markets to crash? Or you are regularly buying shares of good Indian companies?
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Written by Dev Ashish

Founder - Stable Investor Investing | Personal Finance | Financial Planning | Common Sense

13 comments

  1. I love your articles, which have helped me adjust my approach in a positive manner.
    Just adding my tuppence worth of personal opinion here….

    Isn't it an oversimplification that “valuations are on a high”? Obviously there are companies which are comparatively high in valuation. But, in any given situation, one can USUALLY find good buys which are unpopular temporarily. I never look at the Sensex too much, instead keeping an eye on my watchlist. If anything dips to my buy level, I buy it…

    My watchlist isn't that big, just 25 companies or so. Right now, most of them ARE high. Still, once in a month, I usually find at least one company which is either in my portfolio (or watchlist) and is low enough to invest in. At least 5K worth. If nothing is looking great, I just wait for the next month! 🙂

    I'd say it makes more sense to keep an eye on watchlists, that way, you're not buying something *because* it's low. You're buying a company which you feel is fundamentally stable enough to be a good buy, and you already have analysed what price you're comfortable buying this company at. If it hits that comfort level, it doesn't matter if sensex is high or low…

    Of course, once in a while, the sensex dips by 2000 points over a week! Usually, at this time, I have a good time picking up value buys. However, I make it a point to never buy more than 5000 rs. of a particular stock at any given time, no matter how good it looks. I might lose out on some great prices, but I'm committing myself in a phased manner. As far as I can see, as long as the stock market exists, there'll always be good buys available. So why hurry and over-commit? 🙂

  2. Well… the answer very much remains in Value Investing I guess…. If you think the company is good and there is appropriate Margin of Safety in the current price, one should go ahead and buy it.

    I am assuming you have some other steady job/business or even stock market 'Trading' business which generates regular cash for deployment, if the prices go down you always get to buy more.

    Though I personally never like to average down & follow monthly charts, following a few technical parameters to guide me in entry and exit.

  3. Bharat thinks like a true value investor, who cares about buying GOOD stocks when they are on the down and low. End of Story 🙂

    From my end, I still do not have a portfolio. As I am starting out, I want to ensure that my first major purchase is solid. Hence, I am holding my cash and waiting for a crash. Once this base is established for atleast a year, I will start to SIP in those GOOD stocks at small corrections, then I won't act so greedy 🙂

  4. “Losing” money is spelt with one “o” and not loosing. I think the convention of spelling 100,000 is Lakh. Simple suggestions to make your blog better. I do read you blog regularly – good job.

  5. Can you do post on how to build a corpus to in invest in direct equities?
    For example: If a person a target has a target corpus should he 1st bulid his corpus & then start his regular investing ( like ppf, Mutual Fund Sip etc)
    OR maybe start his SIP & keep aside a part of his surplus to build his corpus?

  6. I dont fully understand your query but I will try to answer it as per my understanding. If you have a target amount in you mind which you want to achieve, then you can start an SIP/RD etc to achieve the same.
    But I would request you to please elaborate on the query before I can answer it completely.

  7. Thanks Bharat.

    And yes, its a general statement which says that market valuations are a tad on higher side. This statement is just to be used as an indicator of how the general (average) market is valued. You are right, there are definitely pockets of market which are undervalued currently.

    And having a watchlist makes a lot of sense. I have posted mine on the site too and I have one for my personal portfolio too. And your approach of keeping a transaction capped at a max of 5K seems interesting one as it may cause one to miss some cracking opportunities in market. But on the same hand, it would help one ‘not loose money’ and play fail-safe.

    Thanks

  8. Picture the following scenario:
    A person has say Rs 25000/- surplus monthly which he invests in 4-5 MF SIPs. He plans to invest in direct equity when the market dips/ his shortlisted shares are undervalued. How does he arrange the cash for this purpose?

  9. R U sure you read this blog regularly? If YES, then, I think please stop finding missing letter and try to find the useful meaning of useful article. Brother to run this kind of useful blog is not easy, it takes courage and and great heart.

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