Large Cap Mutual Fund Replication using P2P and Options

“Mutual Funds Sahi Hai” , the omnipresent tagline these days has become a buzzword these days   if you watch TV or read newspaper. In one of the advertisement the protagonist draws the analogy between Mutual Fund and Test match where the probability of making money increases with time we spend holding the mutual funds.

The Interesting thing to note is that he uses the word probability and not guarantee. The ad ends with a blink and miss disclosure that   Mutual funds are subjected to market risk. What should an average investor make out of it. Is there a risk we are not cognizant of? Yes we certainly are ,because we do not know if the future will be like the past and if it is not then we could be a generation with negative return. Now the question  is how do we address this issue.

Lets start with check the last 1 year performance of the  Large Cap Fund vis-a –vis Nifty 50.

Nifty 1 year return : 6%

Funds which gave more than 5% .Almost zero.  You Can see all the top performing funds are ETF barring Axis Long Term Equity.

Its apparent  Nifty outperformed  most funds and technically bulk of investor lost to the Index and paid fees to the fund manager.

Isnt it unfair they get paid when you lose money too! Anyway that story for some other day.

Now we have established that Nifty 50 index is atleast as good as a large cap fund if not better. This means that we should buy  the Index?

The answer is No!

Do you realize a big difference between Equity MF and Debt. Debt pays interest Equity MF does not. If the market doesn’t move at all you are losing opportunity cost in the form of foregone interest .So how do I get the best of both world.

The answer is  Create a structured Product .Combination of Debt + Equity which will have all the upside of the Nifty but no downside.Sounds like a  scam but no.Its possible and very easy to do it.

Lets say I have 100 rs to invest .How do I replicate my Nifty upside  using options.

I buy an ATM call option. Lets check the price of  1 year Call option .Its around 7% for 10 months.You can purchase it using your broking account

 

Now I am left with 93 bucks. Where do I put it. I had published my annual return of 16.5% (P2P January Performance)  through my P2P portfolio. Lets take a more conservative approach and assume 13% return. At 13% 93 buck become 103 in 10 months.

Now lets Compare the performance with holding  Nifty 50 fund vs the hybrid product

 

Scenario I:

Bullish on the market but do not want to risk capital. Buy 1 Call ,invest rest in P2P

Scenario II:

Bullish on the market  ,Can take some risk. Buy 1 Call, Sell Put

Scenario III:

Super Bullish on the market  ,Willing to take full downside . Buy 2x Call,sell 1 Put

Even in the riskiest scenario 3 we are better off creating the hybrid product than buying a large cap Mutual fund.

I have taken conservative numbers where I am receiving 13% from P2P .In reality I can generate 15% plus returns and using it with options can outperform  large cap mutual funds

Its also pragmatic to optimise your money to make the most of it than just do what everyone else is doing.

Referral Codes and Link for P2P Platform:

  •  RupeeCircle (use code PIND145 while registering to get portfolio analysis reports)
  •  I2I  (use referral https://www.i2ifunding.com/referral/ud8cwng83/invest    ,add I2I50%DISCOUNT  code while registering to get 50% discount )
  •  Cashkumar  (Mail me for referral)
  •  LendenClub (use code LDC11989)

 

 

 

 

 

Calculating Portfolio Return for I2I Funding

I had covered portfolio return computation for lendenClub in last post.

Uptill now it was really difficult calculating I2I return using XIRR method and I have to resort to NARR method using R programming.With the release of “My Account ”  feature it has become very easy to calculate portfolio performance.

Step1: Calculate the net income and NPA

I2I publishes the total income after deduction of the Fees under the heading

Now calculate the total amount of Principal under delay. For this go to “EMI  Status”  and sum all the outstanding principal which are more than 45 days past due. ie. if last payment date is 1 nov 2018 . It means 1 Dec 2018 should be next payment date and 45 days past is 15 Feb 2019. Or in  short  loan delay more than 75 days past last payment date are delinquent and you need to add the outstanding principal and consider them as default.

Obviously they can become regular loans in future but we will be conservative and consider them as default

Step 2: Calulate Return

We have the income and the defaults .Difference is the net earning. To get the cashflow go to “My Account”< Escrow Account Status and download excel.

Filter “Transfer to Escrow fund” entries .The Credit associated with these dates are cash inflows you had added to your account

We have now the dates with cash inflow. Covert text numbers into numbers using “text to column” excel function.  Reverse the series so that the latest date is in the end. For inverting series add a number series before the other columns and reorder it from large to small while  selecting “expand selection”.

Add the Net income with negative sign  as a new row with today’s date and then  use XIRR to calculate the return

In XIRR you  need to put date series, cash series and a guess number (put anything 10% etc). You will get your XIRR number.

This is your portfolio return based on the conservative NPA assumption.

Points to Note:

  • Calculate return after you receive bulk of your EMI payments
  • In I2I it takes larger portfolio size to start seeing stabilisation in  ROI due to higher minimum ticket size of 5000 compared to LendenClub
  • Total portfolio return is average  returns based  portfolio weights.

Referral Links and code

  •  RupeeCircle (use code PIND145 while registering to get portfolio analysis reports)
  •  I2I  (use referral https://www.i2ifunding.com/referral/ud8cwng83/invest    ,add I2I50%DISCOUNT  code while registering to get 50% discount )
  •  Cashkumar  (Mail me for referral)
  •  LendenClub (use code LDC11989)

 

 

Calculating Portfolio Return for LendenClub

In my endeavour to create a robust P2P lending portfolio I will cover how I calculate return for my portfolio.I will start with LendenClub and in  the next  few posts will cover rest of the platforms.

The return provided on the platform are expected returns and can be misleading.That is a futuristic projection based on your loan investment and does not factor in the existing as well as potential NPA.

We need to calculate the Return on existing payments and NPA  of the portfolio.

2 method of calculating Returns are :

  • Net Annualized rate of Return( NARR)
  • Internal Rate of Return (XIRR)

Net Annualized Rate of Return is basically the Principal weighted rate of return. You put different amount in investment different months .Each Month you get different return. You calculate each month how much return you generate and what was the principal deployed and then you take the weighted average return

Problem is that this method does not  takes into consideration the amount of cash lying idle in the escrow amount not fetching any return. I will suggest using XIRR as we will find out it is a better approach.

XIRR : This method is fairly simple. It takes as input all the cashflow with the dates and the final amount achieved. One rate of return is calculated which will give us  that output based on the cashflow. As it takes our invested money ,cash drag if any due to escrow amount idle money is also factored in.

 

Now we know the method to calculate the return. One more thing we need to factor in is the NPA. We will deduct the NPA and   loans in delay  from the final result and then calculate the returns.

I use R programming language to calculate returns as it is fast and gives me more analysis capabilities like Future EMI projections etc

I will provide steps to calculate XIRR for lendenclub using excel as everybody is familiar with it.

Step1: Open Account section of LendenClub. Download the following  report from the date when you started investment.

  1. Account
  2. Income
  3. Investment History

 

Step2: Income Statement Sheet

Add all the entries under  credit heading

Add all entries under debit heading

Difference between the two is the net earning.

Step3: Investment History Sheet

Filter all the default ,written off and Delay 3 loans. Sum the principal outstanding. This is your potential default. Remember this is a conservative figure because some of the delay 3 loans will  be repayed but we want to take a conservative approach.

Step4:Account

Filter all the “AddMoney” entries. this the money you have transferred from your account to Lenden.

Select 5 :Calculation

Your Final Account value is  sum of (Addmoney) + Interest earning – defaults

i.e. You add all the rows of add money then take the net earning you got from income sheet and subtract the default you calculated from investment history.

Now add the final amount as last row after all the add money rows. You need to invert the add money series also ( you may need to convert dates from text to date format. Just use Left function in excel(Left(date entry,11), this will remove the extra part after date. For inverting series add a number series before the other columns and reorder it from large to small while  selecting “expand selection”.

 

Now use XIRR ( make final amount as -ve). In XIRR you have need to put date series, cash series and a guess number (put naything 10% etc). You will get your XIRR number.

This is your portfolio return based on the conservative NPA assumption.

 

Points to Note:

  • Calculate return after 4th of 5th day  of month after which date you generally receive bulk of EMI .
  • I will calculate Return for other platform in a similar manner
  • Total portfolio return is average  returns based  portfolio weights.

 

Referral Links and code

  •  RupeeCircle (use code PIND145 while registering to get portfolio analysis reports)
  •  I2I  (use referral https://www.i2ifunding.com/referral/ud8cwng83/invest    ,add I2I50%DISCOUNT  code while registering to get 50% discount )
  •  Cashkumar  (Mail me for referral)
  •  LendenClub (use code LDC11989)

 

 

P2P Portfolio Analytics (January 2019)

In continuation of my blog posts on  P2P returns and performance  I am publishing my  latest quarterly portfolio .  I have steadily increased my exposure across various platforms and my performance has started stabilizing which is a good indicator of Portfolio health due  to diversification.

Portfolio Composition

December Allocation

 

January allocation

Portfolio Changes: I am in the process of unwinding my Faircent exposure .The NPA scenario has still not improved .Hope to atleast get positive return in my investment in Faircent.

Have Kept lenden Portfolio almost constant. Reason is that most loans in lenden are of 3-4 months duration which causes lot of EMI inflow every month .I do not want to sit on cash surplus which means I have to  grow the Lenden portfolio slowly.

I2I portfolio has grown slightly .I use I2I for long duration lending thus my EMI inflow is pretty smooth and manageable

RupeeCircle and cashkumar are the new entry where I am in the process of increasing exposure

Calculating Portfolio Performance: I consider loans delayed by more than 45 Days past due date as NPA.This is  a conservative figure but gives me a good picture to understand portfolio performance. I am using XIRR in Lendenclub while NAR method in I2I to calculate return .With the development of My account page in I2I I will start using XIRR method in I2I too.

I dont have any NPA Cashkumar and RupeeCircle in till now(new portfolio ).

 

 

quarterly Performance

Points to note

  • As it is evident LendenClub has been performing really well. Lot of people stick to one platform which is giving good return.This is not a good way to invest as there are other problems sticking to one platform .Finding good  quality loans in one platform becomes tough after you have invested a substantial amount as you have lot of cash and few loans.Also platform underwriting may become worse when they scale ,so it is best to stay diversified.
  • The returns published on   dashboards  of most platforms are not actual return,they are expected return i.e the amount of money you will make in the investment provided they don’t default.Its a future earning.I post my actual returns based on the defaults thus my numbers look lower but will be closer to real returns.
  • Do not invest more than 5000 in one loan.It may haunt you later unless you have a huge portfolio

Strategy Going Forward: 

  • Move all Faircent EMI to Lendenclub(better risk adjusted Return)
  • Keep growing investment corpus in RupeeCircle (use code PIND145 while registering to get portfolio analysis reports)
  • Increase investment in I2I  (use referral https://www.i2ifunding.com/referral/ud8cwng83/invest    ,add I2I50%DISCOUNT  code while registering to get 50% discount )
  • Increase investment in cashkumar( positives are:short term loans(<6 months), overall good platform performance with low npa, high interest)  Mail me for referral !
  • Will Run Portfolio analysis next month again and compare results
  • Will explore more platform .Platform covered  : finzy,Monexo,Lendbox,Faircent,I2I,Rupeecicle,cashkumar

People who wish to construct a quantitative P2P portfolio can email me.