Application of multi-criteria decision analysis for investment strategies in the Indian equity market

Sudipa Majumdar,Rashita Puthiya,Nandan Bendarkar

doi:10.21511/imfi.18(3).2021.04

Sudipa Majumdar, Rashita Puthiya + Show 1 more

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https://doi.org/10.21511/imfi.18(3).2021.04

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Abstract

In the Indian equity market, the Systematic Investment Plan (SIP) is the most popular strategy due to its convenience for disciplined investing regardless of market conditions. This study analyzes the excess returns of an extensive dataset of listed Indian companies from 2010 to 2019, along with a value-based version of the Multi-Criteria Decision Analysis (MCDA), to identify top performing stocks, based on their sectors and market capitalization. The findings of the study provide empirical evidence of Value Averaging (VA) as a viable alternative strategy over SIP (also known as Dollar Cost Averaging or Rupee Cost Averaging) as 352 out of 359 companies yielded higher returns under VA. The superiority of the VA strategy over the SIP was particularly marked in the consumer goods, financial services and industrial manufacturing sectors, with a clear dominance of small cap companies. The results also show that risk factors for VA strategy play an important role and should be taken into account, rather than base investment decisions on excess returns alone. The efficiency scores of individual stocks provide important insights for mutual funds, financial brokers and individual investors in India.

Highlights

Individual investors and active portfolio managers seek to maximize their risk-adjusted excess returns by adopting various strategies such as lumpsum investing, Systematic Investment Plan (SIP) and Value Averaging (VA)
This study analyzes the excess returns of an extensive dataset of listed Indian companies from 2010 to 2019, along with a value-based version of the Multi-Criteria Decision Analysis (MCDA), to identify top performing stocks, based on their sectors and market capitalization
The results show that risk factors for VA strategy play an important role and should be taken into account, rather than base investment decisions on excess returns alone

Summary

Introduction

Individual investors and active portfolio managers seek to maximize their risk-adjusted excess returns by adopting various strategies such as lumpsum investing, Systematic Investment Plan (SIP) and Value Averaging (VA). SIP ( known as Dollar Cost Averaging or Rupee Cost Averaging) is a strategy wherein an investor puts a fixed amount into a financial asset at regular intervals (monthly, quarterly or annually). If the money is invested in the equity market, the investor puts in this amount regardless of the price movement of the stocks; this implies that the investor buys more shares when prices fall and a lesser number of shares as the prices rise. Value averaging (VA), introduced by Edelson (2006), desires to achieve a target portfolio value (in terms of the growth in the total investment) at regular intervals rather than invest a fixed amount. As in SIP, the VA strategy would involve buying more shares when prices fall and fewer shares when prices are high (Malkiel, 1999) to achieve the set target growth rate. The notable difference would be the quantum of shares purchased under different market scenarios

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