Settlement Finance Investing@12%

What is settlement Finance and how does it fit in my asset allocation?What’s the difference between Invoice Discounting and Settlement Finance?

I have covered Invoice Discounting in my earlier post:

What is Invoice discounting?

Invoice discounting is the practice of using company’s unpaid invoices to raise working capital & fulfil its financial needs. Traditionally, financial institutions including banks and NBFCs have been discounting invoices for MSMEs. Invoice discounting involves transfer of rights on an asset (invoice) from the seller (i.e. business) to the financier (i.e. investor) at an agreed value

The process is a simple method used by companies to generate working Capital. Let’s say company A provide some services to company B.

Company A : mid sized enterprise(SME)

Company B: Blue chip company.

Now B has to pay A money for the services. A raise invoice for the payment. B being a big company takes 2-3 months for the payment.

Now A does not want to wait for the money as it needs immediate cash which can be deployed in business. Here comes invoice discounting.

  1. The firm A borrows money from an investor keeping the invoice as collateral
  2. The investor does not pay the full face value of the invoices; instead it pays the firm a percentage, 80-90%
  3. As the investor now owns the unpaid invoices money , the money due from the end customers is credited to the investor
  4. When the end customers pay the invoices, all the money goes to the investor
  5. Thus investor had put in 90 bucks and got 100 end of 3 months which is the interest he earned.

The advantage over corporate FD is that this funding is backed by invoice as collateral and is thus a secured funding.

The companies which are going to pay are blue chip  thus unlikely to default.

Company A is legally liable to pay you even if company B does not honour the invoice.

All transaction take place in escrow account thus is reasonable safe.

What’s Settlement Finance?

Settlement Financing is a unique product that addresses a specific trade credit use case in India. When a consumer swipes a credit/debit/atm card, the amount is deducted from his/her account immediately. However, the merchant (receiver) has to wait 1 day for these funds to reach their account from the bank. This 1-day capital gap causes cash flow issues in businesses. Settlement financing provides 1-day loans to business that want to reduce their cash flow impact while waiting for transactions to settle from the day prior

The Platform works with registered payment intermediaries/aggregators who gives real time cash receivables to merchants/ATMs post which  the money is received by Platform in an escrow account the following day. Post settlement of lenders cash settlement amount, remaining money is passed to the payment intermediary/aggregator

What risks are involved?

In terms of actual empirical data on risks, TradeCred has facilitated over 350 crores of Settlement Financing till date with ZERO default and ZERO delays till date.

To mitigate these risks:

  • TradeCred does not fund any transaction more than INR 10,000.
  • TradeCred funds only maximum 90% of the total transaction volumes. Just to get a sense, overall fraud risk in the card payments system in India is less than 0.10%.

How It is regulated?

It  is a platform, and not the beneficiary of the funds nor the owner of funds. 

Type of Deals available on TradeCred?

TradeCred has both type of deals:

  1. Invoice Discounting ( Min 3 Lakh)
  2. Settlement Financing (Min 50 Thousand)

Flowchart of expected Return and allocation in various available alternate

To register on TradeCred use the link :

https://buy.tradecred.com/onboarding/apply-now/TC0152

For Invoice Discounting on other platforms mail me on rohanrautela9@gmail.com or ping me on 9967974993

Footnote:

Note: For alternate investment you can use these links

I2I Referral Link

I2I Account Referral Link

(First Use the link to register then add the Code I2I50%DISCOUNT while paying to get 50% off)

Rupee Circle Referral Code- PIND145
Rupee Circle

LendenClub Referral Code – LDC11989
LendenClub

OMLP2P Referral Link

OMLP2P

FinancePeer

(Use Code MNJ6547)

Mail me to get Cashkumar Referral

Invoice Discounting Platform TradeCred Link:

https://buy.tradecred.com/onboarding/apply-now/TC0152

For other Invoice discounting platform ping me on 9967974993

How to choose Mutual Funds for your portfolio

Lot of People ask the question what is the right number of mutual funds in the portfolio.How to choose a mutual fund?

There is no universal answer to it but we need to take a step back and think what we are doing when we buy a mutual fund. We are basically choosing a fund manager to buy stocks on our behalf.If we put everything in one then we are giving one manager too much control and we we invest in too many then we end up holding a new portfolio which has many overlapping stocks and portfolio weights totally different from the base funds.

The steps to choose a mutual fund start from first deciding the asset allocation. We need to decide how much we wish to put in equity , debt and alternatives before even picking a mutual fund

Step 1) Decide Asset Allocation

I have covered this many times how adding alternatives can improve our risk/ return ratio favourably. Low correlated assets is the only free lunch in finance! The various options available these days are:

Assets

Step 2) Now let’s say we have decided how much we wish to put in Equity Mutual funds. I always recommend we should have atleast 20-25% wealth in assets which can be liquidated within a year without risk .Otherwise in an adverse situation we might have to liquidate our equity at loss.

Now we set Criteria for our Equity MF. We have more than 500 Mutual funds ,how do we short list and how many?

First we decide how many Mutual funds we need. For that we need to see how big the stock universe they are covering in each category.

Nifty Universe

This chart represent the nifty top 500 stocks segregation. There are more stocks beyond these which have very small market capitalization

The Large Cap Mutual Funds cover 1st 100 Stocks i.e. Nifty 100

Mid Cap Mutual Funds cover 101st -250th stock i.e Nifty MidCap 250

Small Cap Mutual Funds cover beyond 250 to 1000+ stocks

Interestingly the first 100 stocks are most researched stocks and generating alpha is very tough. Think about it. Everything about HDFC and INFY is tracked by multiple research firms. There is not much insights you can generate. In small cap its the opposite . Not much is available to oustside world and fund manager who can hustle will get the real insights!

That’s why small cap can offer highest alpha but also highest risk as a bad economy can easily wipe out a smaller company.

Now coming to the number of funds we need. For large and midcap 1 fund for each category is enough as Fund manager can easily research these stocks.(small universe and lot of public data)

For small Cap you need atleast 2 Funds with minimum overlaps as you don’y want to concentrate the portfolio and also take away alpha.

We also need one global fund . What is so special about buying stocks in India? Just because we are born here does not mean it’s the best stock market. We will buy one international fund to diversify. It will also act as a hedge when rupee weakens as our returns will be in dollars

We have decided we will buy

1 Large Cap

1 Mid Cap

2 Small Cap

1 International Fund

Note: When market corrects a lot i.e say 10% or so ,you may add one more small cap mutual fund, as when market rise again 1) it’s easier for funds to pick up alpha 2) you want to be more diversified as you don’t know which sector will add the maximum return in a bounce back!

Step 3) Picking the Mutual Funds

I have made a broad filter to pick up mutual funds. People are free to add their own criteria and choose a different mutual Fund.

Based on these criteria I have shortlisted these Mutual Funds:

I also ensure that my portfolio has minimum overlapping and concentration across one stock. People may also opt for index fund in the large cap space. One drawback of index fund is that it has very high exposure to 2-3 names and with the corporate governance issues these days I prefer to keep lower exposure .People who are substantially diversified in other asset classes and also have comparatively lower large cap exposure may use ETF or Index fund in lieu of Large Cap Mutual Fund

Step 4) Check diversification

You can easily check diversification by selecting the weight of funds in your portfolio in a portal like value research.For mutual fund overlap you can go to fundoo.com.For rolling return rupeevest.com

For instance: if you hold

Mirae Large Cap15%
Axis Mid Cap10%
SBI Small Cap10%
Axis Small Cap10%
Franklin US opportunity10%

Then your top exposure is:

HDFC Bank Limited1.35%
ICICI Bank Limited0.95%
Reliance Industries Limited0.91%
Axis Bank Limited0.67%
Infosys Limited0.60%
City Union Bank Limited0.79%
Info Edge (India) Limited0.78%
Avenue Supermarts Limited0.77%
NIIT Technologies Limited0.827%
City Union Bank Limited0.785%
Mas Financial Services Limited0.553%

Even after a company goes bust your portfolio won’t be in deep red!

Step 5) check your liquidity status

I always ensure through my investment in

1)Invoice Discounting

2)P2P

3) arbitrage and Liquid Fund, Saving Bank account

I have enough liquidity to last 9-12 months. Equity investment portfolio should be such that you can live with a 50% fall in the market value and not lose your sleep. Think of it like a 10 year closed ended plan

Lot of people recommend 90% exposure to equity for youngsters. They should factor in that with 10% exposure to other assets the person should be able to meet all the expenses during emergency!

Conclusion: I have tried to construct a portfolio of mutual funds for passive investments which can be rebalanced in 6 months or so. It is important that we hold few but good mutual funds rather than buying whatever they hear from various sources.

Bottomline: You should do your own study and create your own filters .You can post them in the comments!

Note:

Cheapest discount broking and Mutual Fund Investment Platform Zerodha

Zerodha Referral

For alternate investment you can use these links

I2I Referral Link

I2I Account Referral Link

(First Use the link to register then add the Code I2I50%DISCOUNT while paying to get 50% off)

Rupee Circle Referral Code- PIND145
Rupee Circle

LendenClub Referral Code – LDC11989
LendenClub

OMLP2P Referral Link

OMLP2P

FinancePeer

(Use Code MNJ6547)

Mail me to get Cashkumar Referral

For starting invoice discounting mail me or drop a message on 9967974993 or mail me at rohanrautela9@gmail.com

P2P Portfolio Analysis(Aug)

This month I will cover a couple of topics apart from my overall portfolio Performance:

  • How to choose invoices to invest in invoice discounting platform
  • How to Manage your Liquidity efficiently

Portfolio Composition

Portfolio Changes:

  • My portfolio composition has been changing recently based on availability of loans. I prefer to be able to check out loans before investing which makes it difficult to invest in platform like cashkumar were loans disappear in a blink of an eye
  • I2I , RuppeeCircle and Financepeer have adequate frequency of available borrowers in the respective order
  • Lendenclub has many insta loans which I am not a big fan of. I have recently started investing in Insta loans of repeat borrowers only.
  • OMLP2P has good loans but off late frequency has been quite low so I have not increased my exposure

 Portfolio Performance

Performance Analysis:

Key Points from this month’s performance are:

  • LendenClub: I am using InstaLoan only for repeat borrowers now. The impact of stopping auto invest in insta loans should start showing up from next month and yield should pick up from here
  •  I2IFunding : Interestingly collection was able to get back some money from a delinquent loan which came as pleasant surprise.
  • RupeeCircle :Only one delay till now ,that too within 30 Days, not much to complain
  • FinancePeer : Still following my plan of investing in only education loans. No delinquency till now
  • OMLP2P : Very few loans this month so not much change in my exposure here
  • Cashkumar: Good platform but loans disappear really fast .I am keeping my exposure to a small amount as I don’t want most of the capital lying idle in escrow

Exposure Type in each platform

Over the last 12-18 Months I realised that certain platform specialise in specific loans and most of my exposure to that platform comprise those loan. If I have to choose a speciality borrower of each platform which gave me the best purchase for my buck then it would be :

Invoice Discounting Performance:

I keep rolling my invoice discount investments. Currently I am invested In PaytM.

My current Portfolio yield and duration:

How to Select an Invoice:

In Invoice discounting 2 parties are involved viz an Enterprise which is going to pay the invoice money and a vendor which has raised an invoice and to whom you will pay the money now. To be really safe we ensure both our enterprise and vendor are sound even if the deal might be for 30 days

Choosing Enterprise

  • Go with a big name like Infosys, Wipro, Amazon ,Flipkart who are more trustworthy
  • Check Latest Quarterly report if available
  • Current Leverage and cashflow
  • Any adverse news in the last 3 months.

Choosing vendor

  • Financial strength of the vendor to ensure  in the scenario enterprise fail to honour receipt , the vendor is able to pay me .
  • Only invest in those invoices for vendors who have decent record of raising money through the platform and avoid someone who has recently been on boarded

Preferred Tenure of Investment:

I prefer shorter dated invoices: 20 -40 days. The reason is

  • Chances of adverse impact in short duration are less to an enterprise than in 2-3 months.
  • You have more liquidity to meet your short commitment (Liquidity Buffer)

Managing Liquidity Like a Bank

Unlike how most individual manage liquidity poorly banks and other institution try to optimize their liquidity ,though in the recent market turmoil we have seen that even some institution do not manage liquidity efficiently and thus pay a heavy price.

How does a an average person manage his liquidity?

Let’s assume he has a 25 Lakh corpus , he thinks he need to have some fund for contingency like a job loss or sudden increase in expense!

Unlike retail People Banks take care of 2 things

a)Total sum of liquidity in a given time bracket (Asset Liability Management)

b) Quality of Assets (haircut you would need incase you have to liquidate an asset immediately

Most banks have to follow a stringent liquidity requirement called SLR(statutory liquidity Requirement) which is around 18% now which implies that 18% of banks asset should be available to meet any liquidity .SLR has to be maintained in the form of gold, cash or approved securities notified by RBI such as central and state government bonds

Look at how a bank’s liquidity looks like


Its a parallel combination of multiple investment. Some of it would be investments, some cash inflows etc and after deducting all liabilities will be the net liquidity (after haircut)

Now let’s see how a Retail guys manage Liquidity

There are 2 problem with this approach of serial combination of liquidity rather than parallel(Institutional)

  • Capital is scarce so you either pay rent if you want to own it or you get rent for lending. In our case we are lending through Liquid Fund, Debt and saving bank .The rent we are getting is quite low.
  • When we need more liquidity we will have to liquidate Debts or Equity assets where we will have to take a hit. Lot of people assume that market will correct quickly and then they can use the capital but

“Market Can stay irrational longer than you can stay Liquid”

It means that we should not think of stocks or long term debt as a liquidity resort.

Now if we use combination of multiple asset classes parallel we can create a better and more efficient Liquidity.

You may use Kotak saving bank upto 1.5 Lakh as it provides 6.5% and 10k interest is tax free.Arbitrage funds are tax free below 1 lakh capital gain after 1 year

Now we have overcome both our problems:

  • We Don’t need to liquidate stocks for short term liquidity
  • Our Assets give us higher rent with better liquidity( our average earning shoots up from 7% to 12%). We are also more efficient as Arbitrage tax lower than debt!

Footnotes:

I2I Referral Link

I2I Account Referral Link

(First Use the link to register then add the Code I2I50%DISCOUNT while paying to get 50% off)

Rupee Circle Referral Code- PIND145
Rupee Circle

LendenClub Referral Code – LDC11989
LendenClub

OMLP2P Referral Link

OMLP2P

FinancePeer

(Use Code MNJ6547)

Mail me to get Cashkumar Referral

For starting invoice discounting mail me or drop a message on 9967974993 or mail me at rohanrautela9@gmail.com