I dabble in Quantitative finance,Analytics P2P investing,Derivative trading and Product development.My goal is to help people create low cost optimized portfolio .
People who had invested in the Indian stock markets enjoyed a good run last decade, as the market more than doubled up in value since 2010. BSE Sensex, one of India’s most liquid benchmark Index started the decade at around 17,500 and ended at over 41,000, clocking in over 136% return.
Indian Property Index fared slightly worse and gave 80% returns in 10 years,after adding rental yield total will be north of 100% returns ( almost 2x returns in 10 years)
India Property Index 10 years
US Stock Market and REIT Performance in the same period
In the same period, S&P 500, USA’s most liquid benchmark index produced a slightly higher yield of 190%, starting the decade at 1115 and ending at 3231.
S&P Performance 10 years
US REIT outperformed US stock market and gave close to 13% annualized Returns!
REIT performance 10 years
A simple comparison of charts for US vs Indian Stock Market and Real Estate would show that US investments would have outperformed by more than 50%, or by 4.5% per year (compounded). The answer does not factor in the Dollar appreciation
One important component when investing in US stock markets from India is that US markets are denominated in USD, while Indian investments are typically in INR. So for a true comparison, we need to compare how much returns an Indian resident would have generated if he invested INR 100 into S&P 500 (by buying USD for INR 100 in 2010) vs investing those in Sensex. Here’s the simple math to get to the result
Data
SENSEX
S&P 500
USD INR
31-Dec-09
17,464.81
1,115.10
46.53
31-Dec-19
41,253.74
3,230.78
71.38
Investment in Sensex
Starting Capital = INR 100 Sensex Return = 136.21% Ending Capital = INR 236.21
Investment in S&P 500
Starting Capital = USD 100/46.53 = $2.15 S&P 500 Return = 189.73% Ending Capital = USD 2.15*(1.8973+1) = $6.23 Ending Capital in INR = 6.23*71.38 = INR 485
Outperformance = 208%
Investing in Indian Real Estate
Starting Capital = INR 100 Indian Real Estate Return = 189.73% Ending Capital in INR = INR 189.73
add Rental yield at 3%+ Capital appreciation = INR 230
Investing in USA REITS
Starting Capital = USD 100/46.53 = $2.15 REIT Return = 245% Ending Capital = USD 2.15*(2.5+1) = $7.4 Ending Capital in INR = 7.4*71.38 = INR 530
We can chart this out performance by converting S&P 500 and REIT index into INR, and comparing the performance with Indian assets if we invested 100 INR in each asset 10 years ago:
INR 100 invested last decade in S&P 500 in US would have returned INR 485, US REIT would have given 530 while the same amount invested in Sensex in India would have returned INR 236and Indian Real Estate 240
When we add the USD/INR FX conversion to the equation,we see that US market has given more than double the return compared to Indian Market.
Indian Real Estate has been the biggest laggard even if we add rental income to it. Some people would argue that their property made money but that’s cherry picking. It’s like saying TESLA stock gave 100% percent in a year thus all stocks will give the same
It makes lot of sense to allocate some amount of your portfolio to foreign stocks and REIT to achieve high returns in the long run considering the barriers have become lower than ever !
I will also cover some of the new products available to invest
P2P Portfolio current yield and NPA:
Positive Performing P2P Platforms:
I2IFunding: I have shifted most my investment to B category 1 year loans and few Group Loans . Idea is to invest in either safe loans or group loans which have cross guarantee hence lower risk than similar rated normal loans.
The performance of the portfolio has improved and expect few defaults in F and E most of the portfolio is performing well
RupeeCircle: Returns have been consistently good. Most of the investment are in the D to F category. I ensure the borrower has his own house and EMI ratio to Salary is not very high. One delay of a person due to unfortunate accidental death (AIG has started processing of insurance for the same)
Finzy: The first month EMI have been on time. Have been creating 1000 rs loan using auto invest portfolio feature.I will keep a tab for the next 6 months to see if it remain consistent before increasing capital.
So far no delay
Faircent: Group Loans( Education and Consumer) have been performing well without any noticeable red flags. I am shifting my existing term loans to group loans.It’s a good way to park money for medium term.
People who wish to invest in settlement finance can use Faircent for it @ 12%
Underperforming P2P platform:
Lendenclub: Lot of money is stuck in default or NPA category. There is no clarity on status of these borrower which is quite a bummer. I am in the process of taking out money from LendenClub and putting it in rupeecircle.
Cashkumar: The platform doesn’t have enough loans.Also among the existing loans I see lot of delays.Though the ROI is high I will reduce my exposure considering the high number of delay.
Apart from these : OMLP2P and Financepeer I am waiting for few changes before I decide to increase exposure.
OMLP2P( very few borrowers)
Financepeer( need to upgrade dashboard and User interface)
2) Invoice Discounting Performance
Invested in 3 Invoices this month:
I am restricting myself to few names in invoice discounting rather than going for higher yield.
Faircent also has few settlement finance loans yielding 12%
3) Global Portfolio
Some of the top holding in my portfolio are:
Apart from this I have few individual REITs also in my portfolio
I am using stockal to buy ETF and vested for selected stocks( zero commission on stocks)
4) Current Option Strategy :Jan Month
I had sold 12500 CE for March starting of the month as I felt market was overpriced and some correction was expected.
I booked profit after the catastrophic market crash during budget.
I initiated a new position of short Put 10500 Dec as the volatility had spiked an I feel market will stay above that level next few months.Once Market has rallied a bit and I make around 40-50% premium I will book profit.
Based on market valuation I will either sell calls or puts or both after that (also depending on option prices)
For people who are interested in creating a global portfolio I had published various options to select from(Model Portfolio). Paradox of choices is a problem when deciding among many good options.We need first have a starting point then narrow down the products.
Step 1
To make things easy I will publish the asset allocation of 2 of the most popular global Roboadvisor. You may use it as a benchmark and a starting point to create your own portfolio!
In total only 110 stocks and 10-11 ETF available which means you can create a broad portfolio and leave it for long term
For ETF they do charge an annual fees which (0.5% Percentage of AUM) .If you have a small portfolio to start with it works out fine but can be a drag in a large portfolio.For a large portfolio Stockal is more economical.
For People new to foreign stocks and want to get started and choosing VESTED base portfolio should be as given:
1)US Market ETF
2) US REIT ETF
3) Mid Cap and Small Cap ETF
4) Emerging Market ETF
B) People who have more than 4 Lakh to invest
Create a portfolio of the above in Vested and also Register in Stockal to get access to few more ETF and REIT. If you wish to put than 50k in any ETF invest through stockal while for smaller amounts or single stocks you can choose vested
under partner ID use “Randomdimes” to get additional future benefits and renewal discounts
Now we have covered all the basic ETF and completed 70-80% work. Now people with higher capital can experiment with some alternate ETF like:
PSP (Private Equity ETF) : They can invest in all the publicly listed private equity companies like black rock,KKR etc
2. Small Cap REIT exposure : Invesco KBW premium yield REIT ETF , SRET ( global high dividend REIT expsoure) etc
3.High Performing individual REITS to increase specific REIT exposure.
Using these 2 platforms your global portfolio would be constructed which would be low cost, efficient. You get yourself a country hedge, Currency appreciation benefit and also access some of the best companies in the world!
Wish you all a very Happy New Year! Hope to find more interesting investment opportunities and hacks in 2020 .
In this post I will be covering two topics:
Analysis of the P2P platforms for 2019
New Loan and Invoice Products
Introduction to Model Portfolio
P2P Platforms performance
In the 2019 I experimented with multiple P2P platforms .Some of them proved to be successful while others felt short of expectations.
My year end status of investing across P2P platforms:
As it is evident there are 4 platforms where I am currently putting more money , while 2 where I am only reinvesting and other 2 where I am lowering my exposure.
Current Yield and NPA:
In LendenClub/Cashkumar I will be gradually taking out money every month and invest it in Finzy if the performance stays consistent for the next few months!
In RupeeCircle I will be increasing by capital in the next few months while I will keep it constant in OMLP2P and FinancePeer and monitor it closely.
New Product Evaluation:
Couple of new products were available for investors recently.
I2IFunding Education Loans
2. TradeCred invoice with Bank Guarantee
3. Finzy Investment Review
I2I Funding Education Loans:
I2I has recently tied up with an online education company to provide loans to people who are
” i2ifunding has partnered with a India’s leading online immersive live tutoring platform which offers live tutoring and personalized online coaching sessions to students from class 5 to 9 in Math and Sciences from both CBSE and ICSE boards. This loan is given for the purchase of online tutoring classes. Company (Tutoring platform) is a guarantor in these loans and in case of default they will cancel the subscription of tutoring classes and repay the outstanding loan amount. “
Prima Facie the deal seems a good bet as guarantor is the company which will receive the money from the borrower thus the loan is hedged to an extent
TradeCred Invoice with Bank Guarantee:
TradeCred has recently launched a few deals with Zetwerk.Interestingly in some of the deals the vendor has been provided bank guarantee which gives an additional level of comfort.
Zetwerk has recently raised 32 million dollar funding so I consider it to be well capitalized in the short term.
Also TradeCred has enabled instant liquidity options to its client. Any deal with less than 60 days to maturity can be instantly redeemed and money will be provided in T+5 days to the account.
I always recommend that people should do their own due diligence before making the final decision
Finzy Investment Review:
I started my investment in Finzy . The process is very simple in whichFinzy provides an option to create portfolio on your behalf and they distribute the money across various risk category.
Minimum investment is 1000 hence I was able to invest in 50 Loans. Finzy creates a group of 5 loans and calls it a portfolio. Each portfolio will have loans from different risk category.
I was able to create 10 portfolio of 5000 each. My dashboard looks like this now:
Finzy Portfolio does not pick any loans from C category. Average ROI after investing in all loans is around 17.9% . After Fees and NPA I expect to able to generate 14% return.The disbursal is a tad slow but that is not a major issue to worry.
I will closely monitor any NPA and delays and update in the performance in the subsequent months.
Portfolio Asset Allocation: From now Onwards I will create a page with my asset allocation across various assets. I will also publish performance of top rated funds/platforms etc in each asset category. It will make it easy for investors to compare and pick up assets for their portfolio.It will have assets across the globe and will be beneficial for people to start global investing.
In India Real Estate Investment has traditionally been a source of wealth generation. The new generation has started investing in other asset classes too but still lot of people buy Flats as an investments.
Flats are good for living but as an investment they are risky because of:
The sheer amount of money and leverage we have to take to invest in them
We take a very concentrated bet on a specific locality and apartment which is a two way sword.
Another problem which most people do not realise that they invest all their income in India which makes it highly susceptible to country risk(Political issues,economy problems etc)
What are the options for people who want to add real estate to their portfolio with lower risk and lower asset allocation and also want to diversify the country Risk?
The answer is International REIT !
What is a REIT?
A real estate investment trust, or REIT is a type of company that allows investors to pool their money to invest in real estate assets. Some REITs simply buy properties and rent them to tenants, others develop properties from the ground up, and some don’t even own properties at all, choosing to focus on the mortgage and financial side of real estate.
You can think of a REIT like a mutual fund for real estate. Hundreds or thousands of investors buy shares and contribute money to a pool, and professional managers decide how to invest it.
Why do companies launch REIT?
To monetize cash yielding assets which provides capital for investment
Because REITs are required to pay out most of their income(90%), they are treated as pass-through entities and are only taxable at the individual level thus saves tax for corporates.
Advantage of REIT buyer
REITs can be a source of reliable, growing income. Because most property-owning REITs lease their properties on a long-term basis, REITs can be nicely set up for steady income, quarter after quarter. There’s definitely far less variance in the quarter-to-quarter profits of well-run REITs than there is for most other companies, including those that are generally thought of as “stable.”
REITs can be a smart way to add diversification to your investment portfolio. They’re technically stocks, but they represent real estate assets, and real estate is generally considered a separate asset class that isn’t closely coordinated with the stock market.
If you want to invest in real estate, REITs can be a very easy way to get started. There’s excellent return potential in owning investment properties outright, but lot of effort is involved with direct real estate investments ,and you have to pay for lot of additional charges for brokerage,maintenance etc.You can buy shares of any publicly traded REIT with the simple click of a button, and without any ongoing maintenance worries.
As REIT distribute most of the earning as dividend you get high dividend and also access to long term growth of underlying real estate!
Types of REIT:
There are multiple type of REITs (more than 300) depending on what kind of underlying property, and each can explored in depth .Some of the types are
Mortgage REIT
Office REIT
Residential REIT
Healthcare REIT
Datacentre REIT etc
Hospitals, Malls,Industrial commercial properties have the biggest presence
Most REIT are equity REIT while few are Mortgage( i.e they don’t own underlying asset but invest in Mortgage Backed Securities or originate mortgages )
REIT Historical Performance
REITs have historically outperformed stocks in the long run .It does not mean people stop investing in stocks but they should allocate a part of their investment in Real estate through REITs
Performance in the Indian Context:
Interesting international REIT investment has couple of more advantage to the Indians
It isolate us from an Indian specific risk ie. political or economic
We make money on dollar appreciation
As we all know India has higher inflation than dollar and historically rupee depreciates around 3-4% annually against dollar. This depreciation will be added to our returns which can take our total returns more than 15% annually!!
In the last 10 years INR has 4.5% annual depreciation which means if I add it to total market REIT return of 16% we would have made 20%+ .
Obviously what happened in past might not happen in future but we can take it as benchmark to evaluate future returns,
REIT Valuation:
Here are some valuation parameters which we should understand if we wish to buy individual REITs
Traditional valuation methods don’t apply to REITs because their operations are different from traditional companies. REITs purchase properties based on estimated cash inflows from that property over its life term, not on earnings or historical book values. In this case, the assets are more important. REITs are valued based on three main techniques namely FFO (funds from operations), AFFO (adjusted funds from operations), and NAV (net asset value)
Fund From Operation (FFO):
FFO is a measure used by REITs to evaluate the cash generated from their operations. The formula is:
FFO = net income + depreciation and amortization + impairment charges + losses from sale of property – gains from sale of property
Adjusted Fund From Operation(AFFO):
FFO doesn’t deduct the capital expenditures required to maintain the existing portfolio of properties that’s required to sustain properties’ economic income. In other words, FFO tends to overstate a REIT’s profitability. In order to correct this anomaly, some adjustments need to be made to FFO to arrive at a REIT’s cash flow.
AFFO = FFO – recurring capital expenditures +/- adjustments for straight-lining of rents.
Recurring capital expenditures in the above formula are those that are necessary to maintain properties and income streams like new carpet and drapes, appliances, leasing expenses, and tenant improvement allowances.
NAV: One of the most important valuation metrics for REITs is NAV. It tries to determine the underlying value of a REIT. NAV is the market value of all the assets, including cash and indirect property assets, net of liabilities and deliberated dividends or distributions.
Top REIT returns(1 year) :
The numbers are big but the worst REIT performed equally bad!
REIT ETF:
Lot of people do not have bandwidth to learn about each REIT and then analyze it. REIT ETF gives us an opportunity to invest passively in an Index which has market weighted pool of REIT.
The biggest benefit of REIT ETFs is that they let you get diversified exposure to just about every different type of REIT there is. It’s true that REITs are already diversified because of their extensive real estate holdings, but it’s rare for REITs to invest in more than one or two different types of properties. Investors are used to REITs being tied to a specific property class, and so a REIT that sought to be a jack of all trades in the real estate market wouldn’t get the positive reception that you might expect.
In addition, REIT ETFs save you from the complexity of having to put together your own portfolio of individual real estate investment trusts.
There are two main downsides to REIT ETFs. First, using an ETF won’t give you as good returns as you’d get if you made a successful bet on a specific, particularly well-managed REIT. In other words, diversification can work against you if you accept average returns for the sector rather than concentrating on the best players in the industry. In addition, ETFs impose an extra layer of fees, and although those costs aren’t generally very high, they still represent a reduction in the amount of income you’ll receive from your REIT investment.
In USA more than 50 REIT ETF are publicly listed. Here is a snapshot of the top performer !
REIT ETF return( YTD)
How to buy REIT ETF?
Until now the only way was to set up an account in a foreign broker which was both cumber some and expense but recently STOCKAL has made it very easy for Indians to invest overseas ( Annual limit for Indians to invest overseas in a year is 250000 USD).
The platform is pretty easy to use and also provides various performance charts and matrices.
Then you can choose the plan :basic , silver or gold membership depending on how much you wish to trade.
After payment you need to add : “Randomdimes” in partner id to avail offers and discounts in various features platform will be launching and also getting better rates in renewing.
(The account is held in a foreign brokerage firm “Drivewealth” and is insured upto 500000 USD.
The benefits of setting up an International Investment account are numerous:
No home country bias: You reduce the risk of local economy shocks which have become quite probable now
. You can gain from rupee depreciation.
Unlike Indian mutual funds, ETF globally have very low fees (.2-.5% range)
You get exposure to unique assets of developed Markets after from stocks. Some of them would be
REITs
Event Driven Funds
Private Equity ETF
Long Short strategies
You can check out some of the interesting ETF
I will be covering all these products in the future and will soon start sharing my overall portfolio allocation and best performing assets across the globe!
People who want specific details of how I invest in REIT and International stocks can also drop me an email
Recently RBI has increased the investment limit in P2P from 10 Lakh to 50 Lakh. This is a great move for P2P platform which will now attract lot of affluent individuals!
More investors means more crowding to invest ,hence it would be more difficult to find good loans. To prepare myself for this scenario I am exploring Finzy as a platform.
I had opened the account long time back but due to the constraint of putting 50 thousand Rupees initially to start I was apprehensive and decided to give the platform a pass.
Some of my followers had invested in Finzy and based on the excel sheet they shared with me and their own experience , most of them have been able to achieve between 15-18% which is the amount of return I have been targeting from other P2P platforms. Some people have mentioned disbursal is slightly slower compared to other platform(7 Days time approx).
From next month onwards I will start publishing my Finzy portfolio along with other P2P platforms.The foremost criteria which I follow before investing in P2P is to check if the platform is RBI approved or not, which apparently Finzy is!
Some of the salient features of the platform are:
Type of Loans: The ROI of the loans range from 11% to 28% and is divided into three categories viz A,B and C.
The minimum criteria is that the borrower salary should be more than 25000 per month and for business loan annual income should be more than 5 Lakh.
Platform Default Rate: Interestingly Finzy is the most meticulous p2p platform when it comes to publishing data .They update the data on a weekly basis.
Loan disbursed has been more than 50 Cr , thus 5 lakh of default is less than 1%, but we need to note that some of the loans would be disbursed in last few months which may become NPA in future, still the performance seems good if we go by the data published on the website.
Credit Underwriting Process: They have created their own algorithm primarily based on the given factors:
Team:
The core team has seasoned professional which is a positive. Off late I have noticed some platform have young entrepreneur.They tend to be really good with the technology part but they lack the experience to create sound underwriting process and marketing process to onboard diverse borrowers.
The Platform raised some 16 Crores from investors last year which will help in scaling up .
Fees and Charges:
They levy a nominal 1% fees plus service tax only when we receive an EMI .Charging fees with EMI and not at the start of investment put their skin in the game !
Also the fees is one of the lowest as of now among other platforms.
Conclusion:Based on the positive feedback of few followers of my blog and some people in my network and looking at the various attributes I have decided to give this platform a shot. The only bummer is we need to put 50k as the initial amount .
I will publish my experience investing on this platform every month from now onwards
You can register using the Referral code (Registration Free of cost)
Last couple of months saw lot new and interesting loans and products been launched by few platforms.A brief over view on those products
I2I Funding group Loans:
The product is interesting as the yield is quite high and there are multiple guarantor. Due to cross guarantee I will consider it less riskier than single borrower loan for a similar risk profile.
To make the most out of this loan it makes to invest in each member of the group. Another positive is that borrower are women and historically delinquency is generally lower for women compared to men.
I2IFunding Invoice Discounted Loans:
i2iFunding has partnered with Oxigen to provide loan against the amount debited by NPCI from the Micro ATM customer. This amount is settled by NPCI in next 1 to 2 days in Oxigen account. Oxigen will recover the loan amount before settling it further into borrower’s bank account.
This loan is similar to settlement finance loans on TradeCred. The yield is also similar. This loan suit those people who wish to invest only smaller amount else they can choose either TradeCred or Faircent Micro ATM loans instead
A slightly higher risk category with higher yield for invoice discounting is loan against farm product invoices
i2iFunding has partnered with a third party to provide loan against invoices to Fruit farmers and vendors. Company which purchases the fruits will be guarantor in the loans and will make the repayment directly in i2iFunding’s escrow account on behalf of the borrower. As tenor is very low (20 days) if the defaults are close to zero then only it makes good sense to invest here and people should start with small capital.
TradeCred GST discounted Invoices:
This is a new product launched by Tradecred. Above is an example of one such deal. In this kind of setup a vendor has multiple enterprises for which it is providing service( Servify in this example which provides after sales service in multiple category).
The GST invoices are used to see history of transaction with various enterprises ( which are mostly blue chip).
Advantage of this over single enterprise is that your 3 lakh gets distributed amoung multiple enterprises instead of one and vendor will find it easier to pay you if even one defaults. Thus
1) your max exposure to one enterprise is lower
2) vendor does not have a big amount to pay incase of default and hence lower risk of vendor not being able to make up for enterprise default.
If you are very confident of the enterprise then go for normal deal but if you want more conservative trade and want to protect portfolio from black swan event,multiple enterprise is a good option
P2PPortfolio Compositionfor November
Portfolio Changes:
Adding new investments to RupeeCircle
Exploring lower risk loans in I2I( NBFC guarantor, Education Loans, Pool Loans) as initially I had lot of D and E category loans in my portfolio
Adding new investment Faircent consumer loans (Pooled)
Portfolio Performance
Performance Analysis:
Key Points from this month’s performance are:
LendenClub: After discontinuation of Insta Loans my yield has slightly gone up . I will stick to the strategy of investing in only 12 months plus loans. Will not add any new investment
I2IFunding : My yield has stabilized around 15% and now I will start experimenting with different kind of loans. Recently started pool loans!
RupeeCircle : Robust performance continues.As minimum ticket is 5k here this platform is advisable only if you have more than 1lakh to invest
FinancePeer : Fewer loans in last few days but overall NPA still zero
OMLP2P : The yield has started dropping due to idle money in account as very few new opportunities
Cashkumar: Not a good platform if you want to put more than 70-80k as limited loans
Faircent Pool Loans: Investing in consumer loans (pool loans) . It’s a good product if return expectation is around 13%.
Invoice Discounting and Settlement Finance Performance:
I keep rolling my invoice discount investments. Invoices Invested till now
Amazon
Flipkart
Future Enterprise
Paytm
Instakart
Hiveloop
Blackbuck
Cloudtail
I have also invested in Settlement Finance which has daily settlement against Aadhar ATM invoice using TradeCred.
Off late few invoices are raised by vendors which they raise against multiple enterprises thus it diversifies risk of one entity default with multiple low correlated entities who are vetted based on past record with the vendor.
Examples of these are generally logistics companies like :
Blackbuck, Rivago and Deliphery
My current Portfolio yield and duration:
Footnote:
For buying zero cost MF and lowest Derivative Trading
I have covered various high yielding assets which can be used in the portfolio to enhance returns. Most people do not know that they can use their existing long term stock or ETF holding to generate yield. One of the easiest strategy is called Buy Write.
This is a good strategy for people who think market have really heated up and they don’t expect a major bull run in next 6 -7 months .They are happy with a good 1.5% monthly income on the portfolio with some downside protection.
What is a Buy-Write Strategy?
Buy-write strategies, also known as covered calls, involve buying a stock (or ETF) and selling a call option with a strike price generally at or above the current price of the stock. If the stock price rises above the strike you are able to cover the option with the stock you own; if the stock price decreases or stays flat, the option expires worthless. Either way, you get to keep the option premium, which provides a source of income and leads to reduced volatility relative to owning just the stock.
Now lot of people get scared thinking of options as a nuisance. The truth is people lose money not because of the option structure but because of the leverage.
If we take the example of Nifty. One call option has lot size of 75. Which means if I buy a 12000 Strike CE my total exposure is 12000*75 = 900,000 INR. Therefor by using one option you can take lot of exposure ,hence if you take too much exposure you can lose or gain a lot!
If we take calculated exposure and create a strategy in line with our goal ,risk is minimal!
A Simplified Analysis of Buy-Write Strategy
To understand how these strategies work, let’s look at a simple buy-write strategy on the NIFTY 50 Index. In our portfolio, we will hold shares of Nifty and an equal amount of short call options.
So let’s say I have 900,000 worth of NIFTY ETF( 12000* 75= 1 lot of call option exposure at current Nifty value) in my portfolio or some large cap Nifty Mutual Fund of that amount. I will write one option every month
To simplify things further, we will consider market base as 10000 Nifty for the strategy. We will price the call options using the Black-Scholes formula with the Historical IV as an estimate of the volatility and the risk-free interest rate and NIFTY dividend yield. We will rollover the call options every month. On that day, we settle any currently outstanding call options and sell a new one-month call option. Selling the option generates a premium payment but does not change the portfolio value since we are now short the option. The proceeds from the sale are invested in high yield debt .Any P&L at the end of the month will be settled using a cash reserve we will maintain.
eg if we have 9 Lakh of Nifty 50 ETF .We sell a december 10000 call option. Premium would be approx 1.5% i.e
Three things can happen .
Market stays around 10000
Market crosses 10200
Market goes below 9800
Market stays at 10000. You make 1.5-1.9% monthly premium( around 18000 INR which you can invest in high yield assets)
Market goes to 10200 . You make 150 point through premium. You lose 50 rs in call option .you make 200 points in Mutual fund(approx). In totality you made 150 points (50 points lower than if you had only MF)
Market goes to 9800 . You make 150 points in premium. You lose 200 points in Mutual Fund. In total you lose just 50 points compared to 200 points in only MF position.
This would have given you an idea. In choppy market you make good monthly income. In bull market you make less than “Only MF position”. In bear market you save some downside!
Now if I do this strategy monthly how will I fare in various market? I will also compare it with selling Quarterly options also instead of Monthly(3 month maturity)
In the Bull scenario market goes up 15% while in bear market drops 8% in a year while in volatile market stays flat.
Volatile Market Buy Write Performance:
The Dashed line is the option premium. The Blue bars are underlying returns each month. It is evident that in only 2 scenario you ended up paying more than the option premium. In many months you pocketed full premium when underlying performance less than zero.
Total Return = Option Premium of 12 Months + Underlying Index P&L – short call option loss
= 23%+ 0%-13% =10% ( As market was choppy option were expensive and we got good premium selling it.
In total we made around 10% + dividend from underlying which is not bad for a year when our MF dint give any return.
If we would have sold quarterly Options:
None of the quarter had higher returns then our premium .
Total Return = 13.4% -2% +0% =11.4%
It seems that quarterly strategy was more successful but the reason for that was the market was really very choppy and even though it dint move much over quarterly period( total premium is more in monthly but Index losses also high)
Similar Strategy for other markets will yield these results:
I have added one more scenario when Index moved 30% in a year to show this strategy will trail broad market in a one sided bull market!
Let’s see how this strategy would have done in last 6 months which were pretty much volatile:
I have taken option and Index data from 29th May 2019 to 30th Oct and will cover 5 monthly options
Market was 2 % down for the period and was very volatile.
Let’s See the Option Premium we accumulated and losses we made in selling call options.
Market went down for the first 3 months suddenly spiked (After Tax Waiver was announced).
In total we made 560 points after factoring in the loss due to short option position.
Total Return = Option Premium – Option Loss + Index performance = 2.9%
So we made 2.9% in the month compared to loss of -2.2% of the underlying Index. Hence our strategy beat Index by 5.1% in 5 months which is a significant out performance!
Benefit: There are 2 major benefit of this strategy
Income generation in choppy and uncertain market scenario
Tax Benefit
One of the biggest benefit of this strategy is that you can offset all your losses in option Trading against any gains other than salary which means:
Offset against short term capital gain (Debt and Equity)
Eg: if you made 50,000 loss in the financial year on your option Portfolio and your interest income for taxation is 60000 you can offset 50000 loss against it which means 15000 benefit in Tax!! You can carry forward loss to 8 years!
How to do it ?
Zerodha provides the perfect platform for it. In Zerodha you can buy Direct Mutual Funds for Free
Conclusion: This is one of the many strategy which can be used by investors to generate yield from their holdings. If you understand the rationale of doing it you will be happy with the outcome. When you become better at understanding mechanism of options you can implement more strategies using the long term holding collateral and generate more yield.
Eg selling Call Spreads , Put spreads, Iron Condor etc.
It’s important you start with the easy strategy and then gradually implement more complicated ones.
In USA you have many ETF embedded with this strategy
This month I have added a new product available on Faircent. The new pool loans seems to be a good proposition and I thought I will give it a try . I would be investing only in pool loans in Faircent. Before I publish my performance I am briefly reviewing the some interesting loans available on various platforms with brief analysis
Loan Products List
Portfolio Compositionfor October
Portfolio Changes:
Primarily sticking to the 3 platforms like last month: I2IFunding , RupeeCircle and FinancePeer.(Good quality loans, high volume of loans)
I am only reinvesting EMI in these 3: LendenClub, OMLP2P and Cashkumar. Primary reason is that number of borrowers are too few to invest more money
Faircent has recently started few pool loan product where I have started investing recently .
Portfolio Performance
Performance Analysis:
Key Points from this month’s performance are:
LendenClub: I have decided to totally discontinue Insta loan. Reason is that the interest I get is around 40 bucks in 3 months for 500 investment in InstaLoans. Even if 1 out of 13 default(7.7%) I am in loss, this makes it very sensitive to the underwriting and instaloans by nature are risky. I will continue to reinvest in long dated loans with preference to existing borrower
I2IFunding : I2Ifunding performance seems to be good but one thing I noted was that loans backed by NBFC(15%) are almost as good as my portfolio return(Approx 15%). It means I did not generate extra return by active management(I could have just invested in NBFC backed loans). If I see the granular performance I realise most of my defaults are in my early investments( working capital loans, High Ticket size etc) . Platform underwriting has improved over time and also my own skills.In next 6 months I expect my yield to rise by 1% approximately
RupeeCircle :Great performance continues. One loan is in 40 days delay so I have booked 50%of the outstanding principal as NPA as conservative measure. I am concentrating on people with decent salary, High account balance and low EMI to salary ratio
FinancePeer : Education Loan investment has been pretty successful with zero defaults till now.Interestingly they have tie up with institutes which will refund money in certain cases of borrower defaults
OMLP2P : The performance is good but with only 1-2 loans in a week I dont see much investment opportunity as of now
Cashkumar: Same problem.Not many loans and they disappear really fast. Cash lying idle!
Faircent Pool Loans
Faircent has recently started some pool Loans .Advantage of pool loan is that it provides instant diversification and is great for people who are starting(it’s like the ETF of p2p loans) ,have less capital,or who don’t have much time for due dilligence.
3 categories seem interesting
Consumer Loan
Education Loans
Micro ATM loans
Consumer Loans:
Tie up with NBFC (zest Money) which will provide pool loan to borrowers for items they bought from their partners The funds invested in this group product will be used to fund borrowers who wish to convert their purchases into EMIs .They will take care of defaults (in a way charging insurance fees and pay you fixed 14%).After fees you would make 13%
MicroATM Loans:
Through partner organizations faircent in enabling merchants offering AEPS/Micro ATM services to receive instant settlements in their wallets. The AEPS/micro ATM transactions get stuck in banking system for couple of days, this creates a working capital shortfall for small merchants. Through this facility merchants will get instant settlement in their wallet (as a loan), the loan gets repaid once bank settles the transaction. Almost like Settlement Finance but without invoice collateral(Merchant are vetted instead to check credit profile).The tie up is with a payment aggregator called Oxigen
Minimum amount is 10k and you should expect 12% fixed. It’s good alternative for people who can’t invest 50k in settlement Finance
Education Loan:Faircent in association with different partners have launched education loan product. The funds invested in the pool will be directly disbursed to educational institutes/ Partners. Incase of defaults the partner will ensure that money is retrieved from the institute .They will pass on 14% interest rate taking care of defaults
Pool Loan vs Conventional Loans
Pool vs Conventional
Invoice Discounting and Settlement Finance Performance:
I keep rolling my invoice discount investments. Invoices Invested till now
Amazon
Flipkart
Future Enterprise
Paytm
I have also invested in Settlement Finance which has daily settlement against Aadhar ATM invoice using TradeCred.
While In Invoice Discounting I invest in short duration invoices of Bluechip companies, in settlement Finance credit card or Aadhar Payment invoice which is paid T+1 day is financed for a day hence it’s an ultra short invoicing.
My current Portfolio yield and duration:
My Yield has gone up during the diwali week as lot of vendors were providing high interest rates to avail loans due to rising sales during diwali week which require more working capital
Most retail investors invest in stocks , bonds and real estate as a part of their asset allocation.Though stocks and real estate are one of the primary driver of growing economy it leaves the allocation of a common man in the mercy of market movement and Real estate prices which by nature are very volatile.Most common portfolio I have seen is :
Equity Mutual Funds
Debt Mutual Funds
Flat ( for which EMI is being paid)
Lot of people argue that everything tanks to zero they will still have a home to live in, which is not a great argument as failing to may EMI will cause forfeiture of possession!
Common Portfolio
For instance if someone has 30 lakh corpus generally 10 Lakh is invested in Debt ,20 lakh in equity and they have a flat worth approx 50 lakhs for which they pay EMI
This is an example of leveraged portfolio. People keep changing the weight of equity and debt but the elephant in the room is the Flat.
They are paying around 9% per annum on 150% of their networth which is equivalent to 13.5% of their networth . Every year the real estate does not move up they lose 13.5% of their networth !!
It’s alarming but people do not realize because they cannot see profit and loss on real estate as it does not have any mark to market value.
Also people have inflow of salary etc which makes them overlook the loss!
Now let’s see asset allocation of some top University of the world (Yale)
Endowments invest like many other institutional players as well as ultra Rich. They target income to fund their operations/lifestyles indefinitely and overall growth in the corpus.
If you could get a predictable return from your investment then you can tie rest of your networth to long term assets without worrying about volatility. Once you build a large enough financial corpus, small percentages make a big difference.
Yale University also boasts one of the nation’s largest endowments led by David F. Swensen, PhD. Yale University has more ~$30 billion endowment fund which it invest across multiple asset classes.
US Endowment Funds have consistently achieved superior investment returns. This is especially the case for the “Super Endowments” of Harvard and Yale. They have achieved an average 20 year annualised return of 11.5 per cent, 5.4 per cent greater than the returns of a traditional 60/40 global equity/ bond portfolio . US Endowment Funds have diverse portfolios with exposure to multiple asset classes including significant exposure to alternative asset classes.
Yale’s endowment returned 11.4% per annum over the 20 years ending June 30, 2019, exceeding broad market results for domestic stocks, which returned 6.4% annually, and for domestic bonds, which returned 4.9% annually. Relative to the estimated 6.5% average return of college and university endowments, over the past 20 years Yale’s investment performance added $28.6 billion of value in the form of increased spending and enhanced endowment value. During the 20-year period, the endowment grew from $7.2 billion to $30.3 billion.
Yale Asset Allocation
I find it amazing that Yale’s domestic equity and fixed income only account for less than 10% of their overall portfolio. Most of us won’t have such diversification because we don’t have the resources or the expertise in investing in so many different asset classes. But I do strongly recommend following a asset allocation proper that incorporates real estate and alternatives as part of your net worth.
How can a Retail Investor Allocate?
We got an overview of how wealthy institutions and high net worth individuals invest their money so the rest of us can make better investment decisions. Many time people have a very negative view of alternative investments from people who’ve never invested in alternatives before. It’s as if we automatically attack what we don’t understand. You should keep an open mind with a focus on learning new things.We need to assess each alternative for it’s pros and cons and then invest after under understanding the details!. There’s a reason why the rich are rich and tend to stay rich!
With the advent of better technology lot of asset classes which were not available few years back are now within reach of most people. If we make asset allocation as basis for our investment decision we can invest more prudently and not over-allocate towards property just because our primary home tends to be so much more valuable than all our other investments. I keep looking for newer assets and platform which can provide decent and sustainable returns.
