Portfolio Dissection and Yield Enhancement

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How often do you  hear your friends asking for stock tips!and then there are people who are always looking for the next multibagger!

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Well there is no harm in it but what equity we choose has little impact on our portfolio compared to our overall asset allocation and our saving discipline.

1% of a multibagger wont change your portfolio returns if the rest 99% is in a saving account yielding 3% or if you spend 90% of you salary and are always in credit card debt!

How saving and earning impacts your corpus can be seen here.

Also over the course of time we keep on accumulating multiple assets, and our allocation also goes haywire.

Most people keep  a mental account of their  portfolio  which in the long term skew their portfolio towards the biases they have.

A good way for most people to start is to have a look at the current state of their portfolio. As we are well aware in this low yield scenario even 1-2% extra yield is  attractive which can be achieved by making few changes.

You can easily check your portfolio by uploading on value research etc.

https://www.valueresearchonline.com/my-investments/overview

Why to churn or analyze existing Portfolio?

Most portfolio are combination of securities without any mathematical framework to capture and enhance risk adjusted returns

Few details which you can capture which can go a long way in improving the performance are:

  • Portfolio Allocation by assets
  • Portfolio Selection by securities
  • Tax structure of investment

Portfolio Allocation

I have covered it many times how adding multiple low correlated assets can lower the volatility of the portfolio. Here is an old article  on Portfolio diversification benefit.

https://www.annuity.org/annuities/strategies/diversification/

markowitz

As it is evident for a given amount of risk we can maximize return. Also leverage is a tool which has potential to enhance return if used properly. if we get cheap leverage through options/future etc we can tactically add it to portfolio to enhance return. When market had crashed to 8000, a small leverage of 1.2 could have given you 10% extra return till now.

Portfolio Securities Selection

Capturing the details of various equities/debt etc in your portfolio(including MF) can create value for investor which can be explained through an example

security selection

You can break combination of MF portfolio into Nifty + few MF

In my Earlier post I had broken a portfolio of MF into ETF + Small Cap ETF

Let’s take an example:

You are holding 2 large Cap MF. If you do a portfolio analysis you will find out ,You are holding 30-40% RIL,HDFC, TCS ,ITC  why?

The answer is most MF fund manager like to be part of the herd. Think about it. If a Fund Manager does something totally different from all the MF in the market  and the strategy backfires he will have a tough time saving his job but if he mimics the Index 80% and maybe take a slight risk he can always blame  a market crash for under performance and always claim over-performance as his skill.

Lot of People are better off buying few ETF with lower expense and adding small cap fund

Sophisticated investor can go one step further and check if they can use option instead of Nifty to provide protection

In terms of debt , you should always consider your target horizon of liquidity to maximize return.

Example:If you are holding a Liquid Fund Portfolio with 10% exposure to SBI maturing in 20 days and you do not want liquidity why not buy a 4 month SBI paper with same credit risk but higher yield.

If you see total HDFC bond in your complete portfolio is 15-20% you can just buy it for a higher tenor with better yield.

 If you know how much Nifty you are holding in the portfolio you can always sell covered calls to generate yield when market has peaked.

If you have long term holding in your portfolio you can always loan them using SLBM platform( Securities Lending and Borrowing Mechanism) on NSE. Sometimes you can get 8-12% Annualized return on those security. It does not have any counterparty risk as NSE ensures settlement

SLBM

Tax structure of investment

Tax structure is full of anomalies eg: If you book profit 1 day before 1 year it’s short term while next day long term

long term tax

 Derivative Loss Setoff: Derivative Loss can be adjusted from income from remaining heads such as rental income or interest income (cannot be adjusted from salary income). Any unadjusted loss can be carried forward for eight years. However, in the future, they can only be adjusted from non-speculative income. F&O trading loss is considered a non-speculative loss. Intra-day stock trading is considered as a speculative loss. And it can only be adjusted against speculative income. Unadjusted speculative losses can be carried forward to four years.

tax harvesting

Does this ring a bell?Can we utilize these aspect to harvest tax?

There are many opportunity to harvest tax.Some examples below:

  • Buy 2 ETF/MF which have similar underlying. When market corrects ,book loss in one and buy equal quantity of other. This loss can be offset against long term capital gains or short term as per the case.
  • When you want to book profit on ETF,sell a future instead. Whatever losses you make in the future can be offset against your income in saving account, P2P,Invoice discounting etc
  • You can Sell Covered Call in an overheated market( say 1 year call at 10% yield),if market goes down you book profit in option. If market goes up you can use the losses to offset  tax on your interest income.

Conclusion: Many times instead of looking out for a wonder investment we should look inside our portfolio and try to make changes which can enhance the yield  or lower risk .

Randomwalk

I dabble in Quantitative finance,Analytics P2P investing,Derivative trading and Product development.My goal is to help people create low cost optimized portfolio .

2 thoughts to “Portfolio Dissection and Yield Enhancement”

  1. Tax structure part of investment is interesting. Suppose I have long term gain on an equity investment and short term loss on another. Can I sell both and buy back short term investment to get tax benefit on gains?
    Thanks for link to value research online. I have been looking for site like this for sometime.

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