Liquid Fund vs Arbitrage Fund

If it comes down to choosing Between the two :

Arbitrage Fund wins hands down.
Let’s take example for people who are in 30% tax slab as it will make the difference more stark.
Why do you use Liquid Fund? 
1. Liquidity
As the name suggest people use it for liquidity. If you take out money from liquid fund which is considered a debt fund before 3 years you have to pay marginal rate of tax which can be as high as 30%!!
In contrast short term tax in Arbitrage fund is 20%( equity category) and after 1 year is 0 if the capital gain is less than 1 year. Which means even if you have 10 lakh in arbitrage after 1 year you pay zero tax!
2.Low Risk
Let’s look at portfolio of some of the best Liquid Funds in the market. Kotak Liquid Fund.

Let’s look at DSP liquid Fund

Well I see almost 10–15% portfolio in companies like Aditya birla finance ,tata capital ,Trapti Trading, chambal fertilizers etc. They are very safe I agree but even ILFS was AAA.The point is its not zero risk like what most people assume.

Now let’s look at portfolio of an arbitrage Fund. Reliance Arbitrage

70% equity= Pure arbitrage of cash future so zero risk of principal loss
20% FD of banks(HDFC,Federal) = very safe
11% GOI debt/blue chip debt = very safe

In terms of Risk also arbitrage is much better than liquid and chances of loss of principal are  lower.

 3 . Returns
Well there is not much difference in pretax return of Liquid fund and arbitrage fund . Close to 7–7.5%. After tax Arbitrage Fund is better.

Conclusion: If someone wants to take credit risk then focus on funds which invest in credit and P2P Lending. If someone doesn’t want any credit risk focus on Bank FD and arbitrage.
Liquid Fund neither provide absolute safety nor great returns and is a compromise between the two

My article on risk free FD portfolio :

Create a Risk Free Fixed Deposit Portfolio

 

P2P Platform Risk Adjusted Return Comparison

Each platform has different types of Loans and different Returns. How do we compare the platform Returns. An easy way is to see for each category how much Return you are making after factoring in the Fees and NPA.

I have two ways of doing it. One is to rely on platform published data and other to extrapolate my returns as assume in future portfolio will deliver similar returns.

I have calculated both numbers and compared them

I2IFunding:

Let’s the check the Interest Rate published on the platform:

Almost 70% loans are in the range of 18.5%-23% .

Platform NPA status:

If you calculate in terms of Percentage loans delayed beyond 90 Days are around 4.6% .

My actual  portfolio average ROI is 22% and NPA is around 4.5%. Hence Risk adjusted Return = 22%-4.6% =17.4%  .

If i deduct the Fees in the long term I should make around 15-16%  if things remain the same which is approximately equal to what I am already making.(15%).

My portfolio Returns are at par with platform performance

RupeeCircle:

ROI for Rupee Circle:

Average Return is approximately 25%

Platform NPA status:

If you calculate in terms of Percentage loans beyond 90 Days are around 4.2% .

My portfolio average ROI is 25% and NPA is zero at the moment. Hence Risk adjusted Return = 25-0-2.5% =22.5%  .

With time my NPA should increase to platform level and then after fees I should make 25-4-2.5%= 18.5% (as fees in rupee circle is slightly higher than I2I)

Also remember that rupee circle has less number of loans till date and  its NPA may rise . But at the moment I am generating Higher Risk adjusted Return than I2I platform.

LendenClub:

Lenden ROI

.

They have not mentioned but as of now 75% of loans are in unidentified category with average ROI = 48% and others in high and ultrahigh with average Interest = 26% approx

LendenClub NPA:

Interestingly NPA for Instamoney (short term loan) is published separately which is a good thing as it is a different asset class and NPA should be read in a different way. Total NPA published in instamoney =4% approx . A 4% default annualized will be approximately 16% plus annually and after fees you will get 48% -16%-4% =28% .

My portfolio instamoney  NPA is around 7.5% which is  around 30% annually  but this class is pretty volatile. Which makes my return around 48% -30%-3.5%= 14.5% . 

Good part is you get lot of loans and can use auto disbursal also but do expect lot of NPA and volatile returns.

For Non Instamoney Portfolio NPA = 4.11%.

My personal portfolio non Instamoney average return is 26% .My NPA is around 6%. After factoring in Fees I will make= 26%-1.5%-6% =  19%.

Cashkumar:

Cashkumar has only one fixed interest Rate =41%

Again as loans are short dated (approx 4-5 months) 3.35% NPA will approx equal to 8-9% annually.

My historical NPA has been close to 5% which will be approx 14-15% annually . After Fees I should make close to

41% -15%-1%= 24-26% if the NPA does not go higher.

But in short term loans you need to be wary of any change in NPA as they can impact the ROI fast.

OMLP2P:

Average ROI in OMLP2P = 23-24%

NPA in OMLP2P

As of now NPA is extremely low <1%.

With time NPA should go up. I expect NPA to go upto 4% plus and average Risk adjusted Return to be 16-18% after Fees.

As of now my Risk adjusted Return = 20%

Faircent:

Faircent ROI:

Faircent NPA

Faircent consider NPA after 6 EMI delay which is 180 days. For 90 Days delay you can double the delinquency.

My portfolio return after factoring NPA has barely been 4-5% after Fees.

Summary of Performance in table:

My article on Fees comparison:

P2P lending Platform Fees Comparison

Observations:

  • Your Total returns should fall into 15-25% range if you are sufficiently diversified
  • Platform like I2I funding, RupeeCircle and OMLP2P  have less divergence between platform published numbers and my portfolio returns.
  • Faircent has the lowest risk adjusted return while cashkumar highest.
  • Cashkumar and Lenden have high yield and more volatile returns thus can be used to enhance yield(Like midcaps )
  • I2I ,RupeeCircle and OMLP2P can be used to create  a stable portfolio (Like Large Caps)
  • Short Term loans NPA should be taken with a pinch of salt as portfolio churn is higher and  overall capital loss would be much higher than published numbers.
  • Combination of these platform is sufficient upto 10 Lakh deployment without problem.

Footnote:

I2I Account Referral Link(Use Code I2I50%DISCOUNT while paying to get 50% off,Mail me after registering to get further benefits)

Rupee Circle Referral Code- PIND145
Rupee Circle

LendenClub Referral Code – LDC11989
LendenClub

OMLP2P Referral Link

OMLP2P

Mail me to get Cashkumar Referral

Review of OMLP2P

People who have been investing in P2P for a while would agree how difficult it becomes beyond a point to find new borrowers.The only way to tackle is to find more platforms and spread your capital across them.In this process I have recently started investing in OMLP2P . It is too early to comment how my NPA will fare in the long run but I would like to describe my experience in terms of quality of Loans, Fees and where it fits among the other Platforms.

Background:

OML P2P  was setup in 2016 and is registered as NBFC-P2P company. The promoters and board of directors have a decent pedigree in the Lending business. Details of the promoters is available

https://www.omlp2p.com/board-of-directors

Types of Loans: OML caters to both salaried and business loans and on a given time you can expect to have 6-8 loans to choose from .They publish an appraisal sheet of each borrower in which the key parameters

  • Cibil score
  • Salary
  • Average Daily Balance
  • Write off
  • Bounces
  • Details of Loans.

Minumum Ticket size is 5000 as of now.

Average ROI : The ROI  range is quite high in OML.Ranging from 15-30% . If I compare it with I2I and RupeeCircle the borrowers spread on OML is a combination of the two.

In I2I we have either Business loans or Government employees as occupation for 90% borrowers

RupeeCircle generally  has people with salary less than 25000 or business loans.

In OMLP2P I see either business loans or salaried people which salary mostly >25000.

Therefore  ROI in OML for most salaried loans < RupeeCircle (approx 2-3%) because of  more stable jobs

The ROI is generally higher than I2I . For a P3 category loan you can expect around 24-25% Interest which is generally unavailable in I2I but again it’s not an apple to apple comparison as  I2I you have access to lower risk people at 20%. To sum up the various range available in the platforms are:

  • Not considered ultrashort loans (<4 months)

Some of the loans will fall out these range but they are a minority.

As you can see I dont go for the riskiest in each platform mostly  but target 80 percentile in terms of risk as I find it to be the sweet spot. Offcourse some one with a smaller portfolio should start with lower risk and gradually move on to higher once you have built up capital.

Fees: In terms of fees its exactly like I2I where they charge 1% upfront Fees which makes it a better platform for 18 Months plus loans. I had compared upfront fees with EMI based fees earlier.

You can register free of cost at  OMLP2P.

P2P lending Platform Fees Comparison

NPA : I have details of the historical performance of the platform.The numbers look promising but I can comment on my performance only after 5-6 Months .

The platform has disbursed more than 3 Cr of Loans and at 1.5 Lakh delinquency the NPA is staggeringly low . This number will definitely  go up but at the current NPA it seems like a  steal.I think one reason for this trend is that once platform grows the pressure to find new loans is immense and delinquency increases which is not the case with new platforms.

Conclusion: Based on the various parameters I find it to be a good platform for people who are  already investing in I2I and rupee circle and want to add another platform as off late finding loans has become tough due to increasing number of Investors in various platforms.

Some of the things which can be improved are:

  • Reducing ticket size to 2000
  • Adding names of the borrower which help to track them via social media account.
  • Having an app which will make investment process easier

I will be covering monthly performance of this Platform along with others.

 

PS:Lender Referral Link for OMLP2P:

OMLP2P

List of P2P companies in India which have received the NBFC-P2P registration from RBI .Good starting point for people who want to explore new P2P platforms. I have marked in green the ones which I have tried at some point in time

 

 

 

Portfolio Diversification and Alternate Investment

It is known fact that diversification helps in reduction of total risk . Conventional portfolio use this principle and diversify between bonds and equity etc. This is the foundation of modern portfolio Theory.

Let’s take an example . Mr X is 30 year old. Conventional wisdom say he should invest 70% in equity and 30% in Debt.

Let’s look at the risk and return parameters of this portfolio.

let’s assume Nifty gives annual return of 12% in the long run .Historical volatility of Nifty is around 15% per annum.

let the debt portfolio gives 7.5% with annual volatility of 5%.

so a portfolio with 70% in equity and 30% in debt will give = 70% * 12% + 7.5%*30% =10.8%

Portfolio volatility is calculated as

Image result for variance formula 2 assets

Portfolio Volatility = 10.5% for our portfolio

almost 85% volatility is attributed from the equity portfolio which makes the return quite unstable with frequent drawdown.

In contrast to this another portfolio allocation is in practice where you try to balance the risk(volatility) by leveraging low volatility asset class. It’s called Risk Parity

Risk Parity: Risk Parity is approach where portfolio weights are created according to equal contribution of risk. It implies that you can  take leverage for bonds and lower contribution of equity so that your output in terms of return is such that both  equity  and bonds contribute equal  to  volatility.

There is another approach which can be followed which lies somewhere in between and provides good risk adjusted return.

Instead of 70% Equity and 30% bond you will have 30% equity and 130% bond etc so your return matches equity but volatility is low.Problem is during a equity bull run it will under perform the other portfolio

I try to create a portfolio which lies in between these 2 methods where I can participate in equity and also lower my volatility to certain extent. The idea is to find very low correlated assets.

Let’s compare this portfolio (Portfolio B) with traditional Portfolio(Portfolio A):

Portfolio A: Traditional

70% Equity 30%  Bond

I have considered correlation between bonds and equity as 0.3 based on some market reports. It would vary depending on types of bond and historical period you take. Idea is to show the correlation is low.

Portfolio B: Hybrid

 

basically I have used futures instead of stocks to take equity exposure( I am able to leverage 10X approx i.e. by putting 7% margin I get exposure to 70% portfolio.

Cost of exposure is the future premium which is around 5%.

Instead of using future I can also use combination of options. You need to be proficient in Option Trading to implement that strategy

My Returns are higher compared to traditional portfolio because I have leverage. Important part is how much is my portfolio volatility.

I have taken correlation from various reports and true numbers can deviate from my numbers. Essence is to show that most of these assets are not strongly correlated as they have different underlying viz equity, credit, Real estate, Retail loans, Bank FD

Correlation for FD portfolio is zero as it wont show any deviation. I have posted article on creating risk free FD portfolio.

Create a Risk Free Fixed Deposit Portfolio

 

How to calculate Portfolio Variance for multiple assets with correlation?

Here is the formula:

Image result for variance formula multiple assets

Based on this my Portfolio Standard deviation is

 

My new portfolio has better risk adjusted return i.e for lower volatility I am achieving higher return. Offcourse you need to monitor this portfolio for margin requirement,re balancing etc.

If someone is very conservative they can further increase FD exposure ,reduce equity and portfolio volatility will drop further at the cost of some returns!!

 

How to buy Corporate Bonds Online?

When it comes to investing in Debt most people look into only 2 options:

  • Fixed Deposit
  • Debt Mutual Funds

Though these have their own advantages which I have covered earlier, one thing which they lack is liquidity . You end up paying either an exit fees or you have to wait till a stipulated period.

Other problem is It’s very hard to take advantage of a view when you are investing through a Debt mutual fund as   you are not aware of the portfolio at any given time.

It makes sense to invest in  Debt Funds to diversify across debts but you can add your own bond portfolio based on your analysis and save some expense ratio.

The rationale is when you are certain about some company why not just buy the bond directly if it is offering decent yield .Gradually you will  understand the mechanics of the market and would be able to take credit and interest rate view.

You can buy bond at a particular yield and if the yield spikes you can average it or book profit if yield softens. Due to the liquidity you wont face problems in entering or exiting.

So how do we buy bonds. We can buy directly buy bonds from the broking platform.

NSE publish details of the available bonds for trading everyday on it’s platform. It is available under live Market section

 

Various details are available for a bond:

  • Coupon
  • Maturity
  • Volume
  • Yield To Maturity (YTM)

We can check the tentative YTM from this page and select the bond we would like to evaluate. Let’s say we shortlisted Tata Capital 3 year bond.We can then do further drill down:

What all can we see:

  • Coupon = 8.8%
  • Maturity = 27 Sep 2021
  • Category = Sr secondary (It means in case of default we have rights on company access over other lenders)
  • Credit Rating =AAA
  • Coupon Freq = 1 year( You can google the ISIN number to check these details)

Now comes the important part: PRICING.

Bonds are priced by discounting of future cashflow . YTM is the number  if we use to discount we will get  the current price of the bond .

Bonds quoted in the NSE platform with dirty price. What does it mean?

It means that accrued interest from the last coupon date is added to the current price because the buyer will get the coupon not the seller.

Now how to check the current YTM. We also need to check the current yield( which will be higher than YTM if bond is trading at discount.

This is because in maturity bond pays back the principal ,if we buy in discount today we get more than the YTM  but if we buy in premium we get less. So for people who are buying to trade this bond rather than hold it till maturity current yield gives better picture.

To Calculate YTM you can use this link:

http://www.quantwolf.com/calculators/bondyieldcalc.html

 

 

Based on the current price, the bond is trading at 9.16% yield which is better than most FD available in the market. People who are interested in buying this bond should do their own due diligence about the company which should include Fundamental analysis ,market news and sentiment analysis of the company.

The bond has 2.5 years of maturity thus will have small exposure to interest rate risk . We will get coupon as dividend which we have to reinvest.

P2P Platform Analysis (April,2019)

This month I have made some significant changes in my portfolio.

  • I will be adding  a new P2P platform from this month called OMLP2P
  • I have decided to stop my “unidentified risk” category investment in Lendenclub

I will cover the rationale in detail .Let me start with the current month allocation and performance stats

Portfolio Composition

March Allocation

April Allocation

 

Portfolio Changes:

  • I have stopped publishing Faircent performance as I am going to withdraw all my capital from it in the next few months and not going to evaluate it anymore
  • No changes in I2I except the EMI are reinvested
  • Fresh Inflows to Cashkumar and RupeeCircle.
  • Will add OMLP2P in May

 Portfolio Performance:

 

Performance Analysis:

  • The positive aspect has been that rupee Circle  is the only platform I have  been investing in where till now I have not faced any delinquency.
  • My Lenden performance has been steadily deteriorating . After a bit of evaluation I figured out the major reason for fall in performance was due to my exposure in “Unidentified Risk” Category loans.

On the surface these loans look quite lucrative with 48% return but if you try to do understand the payoff of this product you realize 48% is too low for the risk they expose your portfolio too considering the underwriting I have seen lately of Lenden . A small increase in the NPA can change the ROI.

Let’s say average 6% default rate is for loans with terms up to 90 days. Taking this into account, if a loan originator lends 100000 worth of loans, then after 90 days, it can be assumed that 6000 worth of them will have defaulted. Therefore, a loan originator will need to charge 6% per quarter in interest to make up for this default rate. Without compounding, that makes 24%. So if we combine this with the APR needed to cover Feesl costs, we are close to a 30% APR already. This figure is  covering the default rate of the original amount.

Now if the EMI also have 6% default rate ,in 3 months almost 10% will be the default. which is equivalent to 40% default rate plus the fees

Below is a example at various level of default:

In one scenario we are making money while other losses after Fees

Basically even though your number of defaults are just 6%and 7% but due to the short nature of loans you have to take reinvestment risk of the whole capital . i.e for earning 32% (48% reducing rate) a year you have to invest atleast 4 times if you do not reinvest the capital.

Factoring in the Reinvestment  makes a small default of 7% equivalent to 40% plus.

My portfolio was yielding pretty low for the recent the disbursal in “Unidentified Category”. I Can guess that is because Lendenclub is trying to onboard as many borrowers as possible and in the process underwriting is taking a hit.

I will stick  to the longer term category for a while and see if my portfolio performance improves!.

One problem I will face is to find enough Loans but it’s better than making losses

  • Another problem  which has been plaguing me is the paucity of loans in the platforms. Not having enough loans means Either I wait for too long or end up put money in substandard loan.

To overcome this problem I am planning to invest in OMLP2P . The ROI  range is around 22-30% with medium term tenor 12-36 and overall platform NPA seems quite low. They have disbursed close to 10Cr till now and have an NBFC-P2P license.The promoter is experienced in the lending business which is a positive.

Compared to Monexo and Finzy ROI is higher . Minimum ticket is 5000  which is on a higher side but is manageable for people who wish to create a decent size portfolio.

I can comment on my portfolio performance only after 3-4 months of investment.

Footnote:

I2I Account Referral Link(Use Code I2I50%DISCOUNT while paying to get 50% off,Mail me after registering to get further benefits)

Rupee Circle Referral Code- PIND145
Rupee Circle

LendenClub Referral Code – LDC11989
LendenClub

OMLP2P Referral Link

OMLP2P

Mail me to get Cashkumar Referral