Buy and Hold strategy
Also written Buy-and-hold
A passive strategy of buying securities, or setting an asset mix, and then holding without trading — in equities for the long run, in bonds to maturity, and in rebalancing as "do nothing".
In plain language
Buy something good and keep it. The idea is simple, but the workbook describes it in three different contexts, and each has its own emphasis.
- Equities (Chapter 18): buying stocks after thorough analysis and keeping them over a very long time. It does not mimic a benchmark, yet it is classed as passive because the investment is not frequently traded for tactical advantage.
- Fixed income (Chapter 19): the most basic form of passive bond management — buy and hold till maturity to lock in the current yield irrespective of price movements.
- Rebalancing (Chapter 21): decide the strategic asset allocation and then do nothing. The mix drifts, and the portfolio's value becomes a function of the risky assets' performance, with no limit on the upside.
How it works
Equity: buy and hold vs indexing (Chapter 18, section 18.1.3).
| Buy and hold | Indexing |
|---|---|
| Manager identifies stocks and weights | Selection and weights mirror the benchmark |
| Manager must analyse the stocks | Manager must choose the right benchmark |
| Negligible trading | Trades when the index is rebalanced |
| Risks: liquidity, information asymmetry, closure of company, delisting | Index is normally liquid, transparent, periodically rebalanced |
Fixed income (Chapter 19, section 19.2.1). Holding to maturity means:
- no price risk, even as market yields move;
- returns exactly as expected, with all cash flows received as contracted;
- no speculation on interest rates and no intermediate transaction costs;
- reinvestment risk remains on the coupons;
- high-quality bonds are preferred to avoid cash-flow losses.
The workbook notes that mutual fund Fixed Maturity Plans follow the same philosophy, and that immunization is not passive like buy and hold.
Rebalancing (Chapter 21, section 21.4). Part of the portfolio sits in safe assets that provide a floor value; the risky assets provide appreciation. Unlike the constant mix strategy ("do something"), buy and hold generally increases market risk as the risky assets grow.
A worked example
The workbook's bond example (Illustration 19.1). An investor puts ₹1,00,000 on 01/01/20 into a 5-year bond with an 8% coupon paid semi-annually.
- Each coupon = ₹1,00,000 × 8% ÷ 2 = ₹4,000
- Ten coupons are received; the last payment on 31/12/24 is ₹1,04,000 (coupon plus principal).
- Market yields on coupon dates fall from 7.90% to 5.50%, but the investor still receives the contracted 8% coupons. Only the reinvestment of each ₹4,000 happens at the lower yields.
An illustrative rebalancing version. A client starts with ₹1 crore: ₹60 lakh equity, ₹40 lakh bonds (60:40). Over three years equity rises 50% and bonds rise 20%, with no trading.
- Equity: ₹60 lakh × 1.5 = ₹90 lakh
- Bonds: ₹40 lakh × 1.2 = ₹48 lakh
- Total ₹1.38 crore; equity is now 90 ÷ 138 ≈ 65%
The mix has drifted from 60% to 65% equity, so market risk has risen — exactly what Chapter 21 says buy and hold does. A constant-mix investor would sell about ₹7.2 lakh of equity (₹90 lakh − 60% × ₹138 lakh = 90 − 82.8) to return to 60:40.
Why NISM asks about it
Buy and hold appears in three chapters: Chapter 18 (Equity Portfolio Management Strategies, sections 18.1.1 and 18.1.3), Chapter 19 (Fixed Income Portfolio Management Strategies, section 19.2.1) and Chapter 21 (Portfolio Rebalancing, section 21.4). Chapter 21's sample question 4 describes a strategy whose value depends on risky-asset performance with no upside limit. Chapters 18 and 19 are worth 15 marks each.
Common exam traps
- Buy and hold is passive but does not mimic a benchmark (Chapter 18). Indexing mimics a benchmark.
- Bond buy and hold removes price risk but not reinvestment risk.
- Immunization is not passive like buy and hold — it needs readjustment when rates change.
- In rebalancing, buy and hold generally increases market risk as the mix drifts; constant mix maintains exposure; CPPI is actively managed.
- No limit on upside is the buy-and-hold feature in Chapter 21 — not the constant mix feature.
- The workbook's bond illustrations are inconsistent on dates: Illustration 19.1 is a 5-year bond from 01/01/20 maturing 31/12/24, while the portfolio illustration uses the same issue date with maturity 31/12/25. Read each on its own terms.
Check yourself
1.Why is the Buy and Hold strategy classified as a passive strategy?
- a)Because it mirrors a benchmark index exactly
- b)Because the investment is not frequently traded to gain tactical advantages
- c)Because it uses only ETFs
- d)Because it involves no analysis of companies
Show the answer
Answer: (b) Because the investment is not frequently traded to gain tactical advantages
The workbook is explicit: Buy and Hold is not mimicking a benchmark, but it is often classified as passive because the investment is not frequently traded for tactical advantage.
Option A is the trap — that describes indexing. Option D is wrong because the manager analyses the company from every aspect before buying. Option C is invented.
2.In a bond Buy and Hold strategy, which risk still remains?
- a)Price risk
- b)Reinvestment risk on coupon payments
- c)Risk of the coupon rate falling with market yields
- d)Risk of speculation on interest rates
Show the answer
Answer: (b) Reinvestment risk on coupon payments
Because the bond is held to maturity with no intermediate sale, there is no price risk. The investor receives the originally contracted coupon regardless of market yields. But coupons must be reinvested at the yield on the day they arrive, so reinvestment risk remains.
Option C is wrong — the coupon is fixed. Option D is wrong — the investor has avoided speculating on rates.
Where this is taught
Free preparation for NISM Series XXI-BRelated terms
- Reinvestment riskThe risk that the coupons or other intermediate cash flows from an investment have to be put back to work at a lower rate than the original investment earned, pulling the total return below the promised yield.
- Index fundsA passive open ended scheme that replicates or tracks a specific index, investing at least 95 percent of total assets in that index's securities, bought and redeemed from the fund rather than on an exchange.
- Fixed Maturity PlanA close-ended debt scheme whose portfolio maturity is aligned to the scheme's own maturity date, so the investor who stays to the end has a reasonably visible outcome — though never a guaranteed one.
- Strategic asset allocationThe long-term target split of a portfolio across asset categories, fixed from the investor's goals, time horizon and risk profile rather than from any view on markets.
- Constant mix strategyA "do something" rebalancing strategy: trade periodically to restore the portfolio's asset mix to its target weights, keeping market-risk exposure steady.
- Constant Proportion Portfolio InsuranceA rebalancing strategy that keeps a multiple of the cushion — portfolio value minus a protected floor — in risky assets, and the rest in risk-free assets.
- ImmunizationStructuring a bond portfolio so its value at a target date is protected from interest-rate changes — by matching the portfolio's duration to the liability's timing.
- Bond index fundA passive fixed-income strategy that holds the same, or nearly the same, securities and weights as a chosen bond benchmark, so the manager's job is to mimic the index rather than pick bonds.
- Time-based (calendar) rebalancingThe simplest rebalancing policy — resetting a portfolio to its target weights on a fixed schedule such as monthly or quarterly, regardless of how far it has actually drifted.
- IndexingBuilding a portfolio that mirrors an index constituent by constituent — the most common form of passive management, carried out either by full replication or by sampling.