Financial Independence and Retire Early (F.I.R.E)

How many of us are always scared of losing our job while a huge mortgage is hanging like a sword of damocles over our head.

One of the main purpose of investing is to achieve a decent corpus which can help us to be financially Independent. Lot of people in pursuit of this invest based on retirement goals. Theoretically it sounds like a good plan but there are lot of practical shortcoming in it.

One important mistake people make is they think Financial independence is a binary process and on a certain date they will have a certain amount in their bank account and get an epiphany to quit their job. Alas it’s not how it happens in reality as our expense keep changing throughout our life and it’s impossible to plan 15 years in advance .Also until we have enough passive income to pay our expenses retiring is a sweet dream

How many of us had imagined what we are doing today 10 years back. Maybe some of us who had impeccable foresight but not the majority.

So how do we go about planning our Financial Independence?We will realize how important asset allocation is in this process!

3 most important things which will be the primary driver in this are:

  • At what Rate we grow our earning
  • How much we Save
  • How fast we replace our active Earning with passive Earning.

The first point depends on growing yourself which is beyond the scope of investment advice.

Saving is more important than investment. A penny saved is a penny earned.How being cognizant about your savings can drastically improve your chances of early financial freedom can be understood in detail from this article.Insurance(both health and Life are a must)

When we have replaced all our money requirement through passive income is the day when we would be 100% independent.

So instead of categorizing ourselves as Independent or Not we will assess what percentage of Independence we have achieved!

I will illustrate it with example :

For our Calculations I will assume that the person is 35 years old ,Earning around 20 Lakhs per annum after tax and say 30000 PF every month and has amassed a corpus of 30 lakh by now.

People can use this as a benchmark and change the numbers based on their current status.

Scenario I : Conventional Goal Based Approach

The issue with goal based approach is that we use our knowledge of historical performance of mutual funds and put the number say 13% in our calculation.

The number is the average performance of the stock market when it is held for a very long time. It implies that there would be years of large draw downs and years of extraordinary gains.

We can not use this corpus to offset our liability in short period. There is always a mismatch between our Equity investment Tenor and our immediate monthly requirement for which we use active income to support

One thing people need to understand is that when they invest in SIP that each SIP is like a cashflow and each cashflow should atleast stay invested for 10 years to get close to historical average. It means that if you stop your sip by 40 years of age then by 45-50 age you should expect 10% Returns with a given confidence.

To understand volatility of Mutual Funds Read:

https://qr.ae/TW23fd

Average SIP investment duration needs to be 10 years to achieve higher surety of historical Returns

In our example we assume that out of 30 Lakh , he has put 24 Lakh in Equity MF and Rest in debt

Equity investment is for long term and Liability are short term

I have calculated the Financial Independence Ratio

= Current interest Income/Current Liability

It means the money which I get from debt income and saving account ,which can be used immediately for offsetting my expenses and hence provide me independence

Now fastforward 5 years later. We assume the person invest 50% in debt and 50% in equity, salary remains same(hypothetical) and inflation stays 5% for the period.

Portfolio after 5 years

As we can see in an optimistic scenario Equity gave 13% return and we ended up with 2.1 Cr. But in pessimistic Equity dint give return in the short run and we ended up with 1.3 Cr.

Though in the long run our equity will catch up but at this point our interest income can only offset 54% of our liability and we are nowhere near being Financially Independent.

Selecting Mutual Funds

https://qr.ae/TW2Bta

Scenario II: Offsetting Liability Base Approach

In this approach we put a part of money in Equity based products for long term capital appreciation and a part in alternate income generating assets to offset our liabilities and make us financially independent.

We take the same example as in our last approach

Liability Based portfolio

I have assumed my alternate will give me 12% interest. Historically my alternate portfolio has given north of 13% but I would prefer to take a more conservative approach.

To check out my alternate investment Portfolio read this:

2 things are evident:

  • We have higher Independence ratio at 24%
  • We have more liquid portfolio

Still we are a long way off from reaching full independence. Now 5 years later how will the portfolio look.

In 5 years we invested 50% of salary in alternate and rest in Equity MF.

In optimistic scenario as well as in the pessimistic we are better off than first scenario.

At 114% we are financially independent. Which implies that even without our current active salary we can manage through our interest income for months ,even years or we can pursue new opportunities even at lower income without the fear of meeting our day to day expenses.

Though the intention is not to be jobless but to have the peace that we can survive without a job for long duration! Offcourse if we just stop working or inflation will gradually wipe away our gains in the long run.

Actually this is the way how lot of NBFC make money, by giving retail loans, invoice discounting etc. They are highly leveraged hence they make more money ( also take much more risk).

Why does Alternate Investment provide higher Return than normal debt Funds?

The reason is most companies which raise money through debt are NBFC eg: HDFC , Bajaj Finance, Tata Capital etc.

They take money from you and pay 8-9% and lend it to either retail borrower or corporate borrower at 15-20% and profit from the difference.

With the rise of fintech we have eliminated the mid party(NBFC) and thus can get access to the end clients. If we manage diversification astutely it can become a great source of income

How much to put in Alternate Investment?

As a crude ballpark I consider alternate generating 1% per month (12% per annum) and Equity generating 1.1% per annun( 13.2% per annum)

The difference is Equity is locked for 10-15 years while alternate are for short term.Now 0 .1% is a lot in the long run so we should definitely have decent equity exposure.

When we are young and have no liabilities we can have say higher equity exposure and lower alternate and then gradually keep building alternate.

So if we have 20 K of expenses in a month we need to have approx 20L alternate investment to get 20K (1%) in a month to achieve Financial independence .

As our liability keep growing we also keep building alternates while equity will take of long term corpus building along with it.

Footnotes:

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 or mail me on rohanrautela9@gmail.com


P2P Portfolio Analysis(Sep)

Now my Alternate Investment Portfolio is composed of 3 assets:

  • P2P invest ( approx Return 15-16%)
  • Invoice Discounting (12-13%)
  • Settlement Finance( 11-12% approx)

Each has it’s own advantage in offering better liquidity or better return. The good part is all these 3 asset classes have low correlation with broad market and provide some stability to overall portfolio in volatile times like these days!

This month I have made certain changes in the portfolio as the size has become big and some platform do not offer enough loans to provide meaningful investment opportunity.

Portfolio Composition

Portfolio Changes:

  • 3 Platforms have consistent supply of new loans: I2IFunding , RupeeCircle and FinancePeer.(I intend to make these primary platforms)
  • In I2I I have decent exposure thus I am investing fresh capital in RupeeCircle and FinancePeer for next couple of months.
  • 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
  • I allocate a fixed monthly amount for my P2P portfolio in the same way people do it for mutual funds.

 Portfolio Performance

Performance Analysis:

Key Points from this month’s performance are:

  • LendenClub: I am not very happy with LendenClub performance mostly in the InstaLoan category where default rate is pretty high. I Have stopped Auto Invest and now only invest in repeat borrowers and few high risk category loans.
  •  I2IFunding : I have made I2IFunding as my defacto platform for government employees( Municipality, Jal Board etc) and ultra safe borrower( A, B and C).Performance has been consistent
  • RupeeCircle :Strong performance continues with just one delay till now! . 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
  • OMLP2P : very Few borrowers this month so no changes in investment
  • Cashkumar: Yield has gone down due to cash lying idle in the escrow. I might reduce my portfolio exposure if situation does not change
  • I am attaching Financepeer Education Loan Brochure pdf
  • People who want to be put in broadcast for FinancePeer Loan may add this number : 8419975005

Calculating P2P return using XIRR vs EIV method

XIRR is the popular method and superior to NAR (Net Annualized Return) method which does not take into account cash lying in escrow account.I generally use XIRR method to calculate the returns of P2P but in some situation EIV(Equivalent Investment Value) might be more apt.

XIRR method:

This method equates the present value of cash flows and presents a better picture on the returns but a major limitation is that it leaves out future cash flows. The XIRR method accounts for all cash flows into and out of the Account. While this method is most suited for most investors I can show certain situations which can be problematic.

The difference between the 2 is that in second case we had a big cashflow (Dec’18). We have not received interest for that but it shows in the cashflow thus our overall ROI dips. This is quite common for people who have recently started investment and the new cashflow is substantial.

For people with decent old investment this might be not a problem/

Equivalent Investment Value Method

EIV works on a simple principle that an amount Y invested for X days is equivalent to Y*X amount invested for one day. For example, ₹ 10,000 invested for 10 days is equivalent to ₹ 1,00,000 invested for 1 day. Applying the principle on the account transactions of a P2P lender, the EIV is calculated as follows:

EIV = (∑YiXi)/X1

where,

Yi=Invested Amount (positive) or Withdrawn amount (negative)
Xi=Number of days since the investment to today
X1=Number of days since first investment

Return on Investment = [(Interest + Late Fees – NPAs)*100]/EIV

In this method as the last cashflow was only for 30 days hence it’s impact is less in the second case unlike in XIRR.

People can choose either method depending on which suits their portfolio more

Invoice Discounting and Settlement Finance Performance:

I keep rolling my invoice discount investments. Currently I am invested In Amazon and Flipkart

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:

*settlement Finance is rolled daily

Footnote:

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 or mail me on rohanrautela9@gmail.com

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: 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

Conventional vs Hybrid Portfolio Backtested Performance

How would  have a portfolio of  just equity and bond funds performed vis-a-vis hybrid portfolio of (equity + Alternatives)?

First let’s see how the equities performed in the last 12 months. I will take the Index performance for large cap, mid cap and small rather than some mutual fund as it will give a better unbiased picture.

  • Stock only Portfolio Performance

I have taken 100 as a base to make it easy to comprehend

It shows that if someone started with 10 Lakh in small cap fund in Jan 2018 they would have 6 lakh left after 1.5 year.

Lot of people think about stocks in terms of volatility and Return but drawdown is one really important factor to consider. How many people can digest 40% loss in value of their portfolio. Though I am sure if they hold it for a long time they will eventually make money but it’s  easier said than done.

  • So we move on to our second portfolio which people generally hold : combination of debt and equity.Let’s say we hold 25% debt and 75% equity divided equally between large ,midcap and small cap .Now how will our return look like

So total portfolio return will look like:

In 1.5 year you achieved a 17% loss on capital or 1.7 lakh loss.

Points to consider

  • Lot of people invest through SIP and believe that they would be able to ride volatility but unless you have recently started a SIP it wont really help you in averaging.

I had written a blog post on this topic

http://randomdimes.com/2019/is-sip-better-than-lumpsum-investment/

To put it simply Let’s say you had accumulated 100 shares at  average cost of 1 rs  over 100 months.Now your total asset value is 100

If market drops by 50% you will buy 1 share at .5 rs your average cost = (.5*1 +1*100)/(101)=.995 also your total portfolio loss is 50 Rs regardless of the SIP.

  • Without going into any maths it is quite evident all the index are moving together which implies our losses and gain will move together ie. either we will make lot of money or lot of losses.

Alternate Assets Performance:

  • REIT performance from the time it was launched in April 2019 ,staggering 18% return in 4 months

  • My P2P portfolio performance

 

Let’s say average return on P2P is approx 15%

I will take average of my  Invoice Receivable average return is 12.5%

If I add all the alternate investment with stock portfolio then last 4 months the graph would look like:

It is clearly evident that correlation between stocks and REIT or stocks and P2P investing is very Low or -ve ( the graph are in opposite direction). If we combine the assets uniformly  we can get a portfolio which has lower drawdown and higher returns .Even with the stocks performing poorly this portfolio did not face any drawdown,.

So how to allocate weights to various assets.

There are two types of asset allocation : Strategic Asset Allocation and Tactical. 

  • Strategic asset allocation

It is your base level allocation which you follow most of the time.You can either construct it mathematically

The easiest mathematical ways to do it is  Mean Variance optimisation and Black Litterman  .

People do not need to actually to follow a rigorous methodology but based on their age and risk appetite they can allocate to stocks and bond and the rest to alternate.

eg: for a 30 year old 50% stocks 20% bonds 30% alternate is decent while for a 50 year old 30% stocks 35% bonds 35% alternate can be better.

Off course the individual risk aversion is paramount to create a strategic allocation

  • Tactical Asset Allocation

If someone believes market is efficient then there is no scope of tactical allocation as we expect all information is factored in the prices but we do invest in  mutual funds because we think that market are not perfect and there is scope to outperform it.

Tactical asset allocation is one way in which we can go overweight or underweight on market during certain times

Basically market returns are a a factor of Value and momentum to an extent. During phases when stocks are fundamentally undervalued we can overweight our equity portfolio while during times when market is in euphoria we can gradually start  reducing our allocation.Here I would like to add the primary aim is to reduce risk as we do not wish to get caught with a huge position in a stock bubble

The problem with conventional Bond and Equity portfolio is that there is a huge opportunity cost of not investing in equity 100% of the time as bond returns around 7.5% are too less to offset the missed chances of bull rally . ie. if you take out money out of equity and put in bond you get only 7.5% while you wait for market to correct and you miss lot of returns in the meantime.

Now our portfolio has stocks,bonds and alternates,how do we go about creating a tactical allocation

When we have alternate which provide almost same return as midcap stocks then we can always increase their allocation during an equity euphoria.

I prefer the PE and Rolling Returns  based approach as it is the simplest. These are not rules but just indicators.

Empirically it has been shown that market has given a higher average return when PE levels had been low and vice versa

For instance if Nifty PE has crossed 30 I would be wary of the market and would try to book some of the profit and transfer it to P2P, Invoice discounting ,debt etc  while if PE is below 20-22 I will gradually increase equity allocation.

The problem is sometimes market continues to rally during a growth stage and sometimes it  keeps falling. I am fine with that as my alternate are already giving a decent return and I don’t want to take the risk of a sharp equity fall during overvaluation phase

Other problem with PE based investing is that over a period Nifty PE has gone up due to changes in its composition, PE doesn’t factor in inflation etc but what we want is just to get an idea about market not some sacrosanct number.

eg : if Market goes to 9000 in next 3 months  we can increase our allocation while if it rushes to 13000 in next 3 months we can go overweight alternatives.

Conclusion: Backtesting a hybrid portfolio shows how a low correlated portfolio helps in reducing risk and can be an important tool in tactical asset allocation during a recession or a rally.

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

 

P2P Portfolio Analysis(July)

To enhance my portfolio diversification I have increased my investment in some of the platform which have been performing well and my initial investment had been low. viz OMLP2P  and FinancePeer.

I have also decided to not increase my investment in Lendenclub and cashkumar  for now  primarily because  auto invest is very slow in these 2 platforms and it’s a hassle to invest manually in these. I am using these platforms as liquidity buffer (replacement for Liquid Funds) as they have short maturity and I can use the EMI if I need cash in future

Portfolio Composition

Portfolio Changes:

  • My portfolio is more uniformly distributed now  among multiple platform compared to when I started
  • I have added fresh investments to FinancePeer and OMLP2P

 Portfolio Performance

:

Performance Analysis:

Key Points from this month’s performance are:

  • LendenClub: I had mentioned I am  cutting down my Insta Loan exposure ,slight increase in my portfolio yield can be attributed to it
  •  I2IFunding : Have decreased investment size per loan in D and E category to 2000 per borrower to diversify  optimally
  • RupeeCircle :Till now 1  delay that too within 30 days
  • FinancePeer : I am using the platform only for Education Loans which is going to add a new diversification to my overall portfolio. No defaults till now
  • OMLP2P : I am sticking mostly to  salaried People in OMLP2P. For the yield I am getting ,the credit worthiness of the borrowers is pretty impressive here.
  • Cashkumar: The yield has been fluctuating between 13-14%. The platform is decent but very tough to find borrowers even after auto invest which makes it good for only small investment

*some fluctuation in yield and NPA can be attributed to the date on which I calculate returns i.e sometime I receive EMI just after calculation, thus people should focus on the trend rather than look at individual numbers

Historical Default Pattern for each Platform:

I2IFunding: 3 defaults 90 plus days:

My Portfolio breakup : around 70% is in D category Government Loans 20% in E and 10% (B&C). On a hindsight I would have invested in C and B categories more  in the start rather than going for D category totally.

Although Municipal employees in D category have performed well in my portfolio

Below is the status of my delinquent loans

The absconded guy was from category F, I could have avoided that loan as the guy had made enquiries in 10 other places which is a red flag.

The 1st loan was from E and 3rd from D.

That’s why diversification is very important especially in high risk loans

OMLP2P : No Defaults 

My portfolio breakup:  75% of portfolio is in salaried(P2,P3 and P4) while 25% is high quality business loan(B2 and B3)

Interestingly in OML  we have even MBA candidate with 60K monthly salary in P3 Category giving 23-24% which is much higher ROI compared to a similar credit loan in I2I.

RupeeCircle: No Defaults

My Portfolio breakup: 50% D category 30% E Category 20% F

Range of ROI is 24-30%

RupeeCircle has some really High CIbil score borrowers(750 +) even though salary is low which implies that they have decent credit history but due to the nature of their job they do not have access to cheap credit from banks  which is a great opportunity for P2P investors!

FinancePeer: No Defaults

100% education Loans

ROI  is 20%

Till now the platform does not have any defaults in this category as the parents are guarantor of the loan and wilful defaulters would be very low.

(Need to keep in mind Financepeer does not charge any Fees so 20% in FInancepeer is equivalent to 22-23% in other platforms)

LendenClub: 12% Default

Portfolio Break up 35% in Insta , 65% in High Risk

Interestingly my Portfolio yield is 30% plus but due to Defaults the net yield is 15%. Yield will dip now as I am reducing Insta but NPA will also come down

Default break up: 75% of my defaults are in Insta Loan while rest in other category

 

 

Cashkumar: 1 Default

Defaulting guy had average monthly account balance less than 1000 .Repayment capacity of such borrowers will always be doubtful

P2P investment Pyramid:

Based on my experience I have created a structure for people to follow when they start investing in P2P .People should start from the base and then go up the pyramid

 

It implies people who are starting to invest or have lower capital to invest should first concentrate on the Loan categories and platforms which are at the bottom of the pyramid and invest lesser on the ones at top.

Eg: if you have 10Rs : Invest 6 in base  3 in middle and 1 in top.

When the investment amount grows you can increase the allocation for mid level

eg: if you have 10Rs : Invest 4 in base  4 in middle and 2 in top.

Logic: if some one is sufficiently diversified it doesn’t matter which category he focus more on as the expected payoff is same

ie. for 25% loan at 10% default you earn almost same as 20% loans with 5% NPA.

The reason for the structure is that though payoff of the total portfolio is deterministic the path of return is not uniform.

Let’s say we have 100 Loans , in a high risk category 10 loans will be bad but portfolio will give 25% ,while in low risk 5 will be bad but portfolio total return is same.

For someone who  starts to invest in 10 loan ,he can pick up 10 bad loans in first scenario  while in the other max bad loans he can pick is 5. This can  make his portfolio performance substantially even though for few months.

One factor which can further worsen it is that a new investor lack the experience to pick up good loans hence chances are higher that he will pick up bad loans. With experience he can improve the skills.

Once he has 100 loans it does not matter in  which category he invested more as the net payoff is similar.

To enable this kind of investment one can use small ticket size for high risk loans(say 2000) and larger ticket for safer loans(say 5000)

Invoice Discounting Performance:

I keep rolling my invoice discount investments. Currently I am invested In Flipkart and Amazon for average duration  40 Days

My current Portfolio yield and duration:

While selecting a company in Invoice discounting factors which I check:

  • Latest Quarterly report if available
  • Current Leverage and cashflow
  • Any adverse news in the last 3 months.
  • Financial strength of the vendor too ensure  in the scenario enterprise fail to honour receipt , the vendor is able to pay me .

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

 

P2P Portfolio Analysis (June,19)

This month I have added FinancePeer in my portfolio to take exposure to Education Loan borrowing. Apart from publishing my portfolio performance I will also cover :

  • My Receivable Finance Portfolio Investment
  •  Capital Structure of my investment and Liquidity Analysis

Portfolio Composition

May Allocation:

June Allocation

Portfolio Changes:

  • I have started investing FinancePeer
  • I have increased my portfolio exposure to RupeeCircle,OMLP2P
  • Have cut down my “InstaLoan” Portfolio in lenden .No more fresh deployment to instamoney

 Portfolio Performance:

 

Performance Analysis:

Key Points from this month’s performance are:

  • If you see lendenClub performance it has gradually dipped. Major culprit has been insta loans. Now as I am cutting down my Insta Loan exposure hopefully I will be able to gain 1-2% yield in next 4-5 months.
  • I2I has been more or less (between 14-16%). People who are starting in I2I should focus on safer loans( preferably C and  good D) .
  • RupeeCircle has been the only platform where yield have actually gone up with time. This is the first month where I have delay in EMI.If it doesnt go back to normal I may see a drop 1-2%  in yield after 2 months when I put it as an NPA though I have already considered 3% of return as NPA in form of provisioning.
  • Cashkumar have only 2.5% but due to short term lending and small size of book overall returns look low,which should improve with time.
  • FinancePeer I am sticking to only educational loans .Hope NPA are low as promised in the category.
  • OMLP2P ,as of now I have not faced any NPA but as my investment are fresh I will wait for a month or 2 before giving any verdict.

 

Invoice Discounting Performance:

I have been investing in a couple of Invoice discounting platforms. Some of the companies whose invoice I inivested in are Paytm and Indian Oil. Most of the invoice are blue chip.Some of the Invoice available to invest are:

  • Cognizant
  • Maersk
  • Yesbank
  • Amazon
  • Wipro
  • Oracle
  • BHEL

The range of yield is between 12-15% for the invoices  and duration 30 -90 days

My current Portfolio yield and duration:

Capital Structure:

Lot of people ask why they should invest in other assets when equity can give 10-15% in long run. The answer is ,do they have the capacity to digest monthly volatility of 5-6% on their complete corpus.Second, how do they mange their liquidity. What if they need money in next 3-6 months will they  book losses in mutual funds and redeem them?

Alternate asset class is a way to fill the place between low yield and high yield  , low liquidity vs high Liquidity .It also ensure construction of  a portfolio where asset classes have low correlation among them.

Let’s Look at how a conventional portfolio looks like:

 

The allocation may vary depending on age. For instance a 35 year guy will allocate more to equity than 45 year old. If someone has 20 Lakh then 10% is saving = 2Lakhs, 25% small cap = 5 Lakh etc.

Now look at a portfolio with alternatives:

Three things stand out:

  • Overall return is higher 11.7% compared to 10.7% as our capital is not tied to low yielding assets.
  • We have more liquidity. Almost 50% portfolio cashflow is received within 2 years ,which implies we can use it for emergency or for near terms goal as we have more certainty.
  • Our asset classes have very low correlation among themselves.

in original portfolio  our equity can have 10% drawdown in a month and as 50% of our portfolio is in equity almost 5 percent of our portfolio will drop.

In alternate portfolio we have reduced equity allocation to 30% thus only 3% impact ,thus overall volatility of portfolio drops.

Therefore adding alternate asset classes in portfolio helps to improve Returns,  Liquidity and  lower Volatility

 

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

 

Review of Finance Peer P2P Platform

Finance Peer is a new addition to the P2P lending Platform which have received NBFC-P2P license.

Background: FinancePeer  was setup in 2017 and is registered as NBFC-P2P company. The promoters and board of directors have a technical background and their intention is to create a lending system based on using machine learning to underwrite the loans

Details of the promoters :

https://www.financepeer.com/team/

Financepeer has already raised a funding of $500,000.The office is in Lower Parel mumbai

Types of Loans: The highlight of this platform is that it caters to 2 Kinds of loan:

  • Salary Loan
  • Education Loan

They have tieup with educational institute where they provide education loan which is paid by the parents. As risk of not repaying the loan can affect the education of the child thus default rate is very low.

Minumum Ticket size is 5000 as of now.

Average ROI :

Almost all the loans on the platform are at 20% ROI and tenure is less than 12 months. Ideal for people who looking for short term investment in low risk loans. They display their own score based on the AI algorithm.

Fees:The good part is that they do not charge Lender any fees which is a bonus as most P2P platform charge between 1-4% thus reducing the actual earning.

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 . Educational Loans have historically low delinquency and can be a good addition to portfolio.

The current NPA is below 0.5% and is at the moment one of the best in industry but only with time we can predict how much of it will be maintained once the scale up.

Conclusion: Based on the various parameters I find it to be a good platform for people who are  already investing in other platforms and looking to add a new variety of short term loan to their portfolio.

Problems which they can work on

  • Reducing ticket size to 2000
  • 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  free Registeration

FinancePeer

(Use Code MNJ6547)

 

 

12% Return alternative for Corporate FD

Lot of people invest in Corporate FD to gain some extra return over bank FD’s.  We know there is an element of risk as this is a form of unsecured lending and in event of company default capital maybe at risk. There is an alternate solution for people who can make 12%-15% which is much better than the top corporate FD  in the market with reduced risk .

What is the Solution?

Invoice Discounting Investment!

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.

How to to participate in Invoice Discounting?

In India Kredx is the most trusted invoice discounting platform. KredX is an online invoice discounting platform where business owners get an opportunity to raise funds for their working capital needs at attractive terms by selling their unpaid invoices raised on blue chip companies.

It is backed by Sequoia Capital has received more than  50 Cr Funding.

Points to Note:

  • KredX  minimum investment is 3Lakh , Time duration would be between  30 days to 90 days.Expected return would be 12-20% annualized.
  • KredX fees is 0.15% of investment amount.
  • Also, investors are made available the credit history of the SMEs and they know which Blue Chip company was the invoice raised for. KredX also does a verification of the invoice with the Blue Chip Company,gets a posted dated cheque from the SMEs in case of contingencies , operates an escrow account which helps the  investor get back the money in case the Blue Chip company does not pay

Example:

lets’s say company A wants to raise money against invoice of 100,000

SME discounting rate = 15%

You will invest around 96000 and get back 100,000 after 3 months

Kredx Fees = .15% / month = 450 in 3 months (approx)

So you make around 3500 in  months or around 14% annual returns.

 

Sample screenshot of dashboard:

 

Pros:

  1. Shorter investment duration(good liquidity)
  2. secured Lending
  3. Better than corporate FD
  4. No defaults till date
  5. Low correlation with stock market

Cons:

1. There is a small chance that Blue chip company defaults or SME becomes bankrupts within 3 months .Unlikely but possible

2. Minimum ticket is high at 3 lakhs

Conclusion:

People who have capital surplus and have deployed lot of money in Corporate FD, Liquid Fund , Bonds etc can use this asset class to achieve decent return.More secured and higher liquidity compared to corporate FD and unsecured bonds

Not a good investment for people who have just started investment because of high minimum ticket size.

People who are interested and want to know details/register for free please contact me on mail on rohanrautela9@gmail.com  or message me on 9967974993