Are Gilt funds Safe? Should you invest in gilt funds? - A complete guide

Are Gilt funds Safe? Should you invest in gilt funds? - A complete guide
by Prasanth Menon 17/07/2017
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Of the several mutual fund's product categories available in the market, gilt funds are probably the least understood product category. Many retail investors stay away from gilt funds and many others have wrong strategies when investing in gilt mutual funds. Gilt funds invest in Government securities or bonds with varying maturities.

Misconceptions about Gilt Funds:

Gilt Funds are Risk-free investments: While the Government securities themselves are risk-free with respect to interest and principal payments, the price of the securities fluctuates with changes in the yields or interest rates.

Gilt Funds are as risky as equity funds: Gilt Funds are more volatile than other debt fund categories because if interest rates go up, the NAVs of gilt funds will decline and it is even possible to get negative returns in the short term. However, unlike Equity funds, Gilt funds will secure the principal amount at least.

Now that you are aware of the concept of Gilt Funds let’s take a look at their feasibility as investments.

Reasons to Invest in Gilt Funds

The 10-year Gilt yield has been on a decline from around 9% from 2014 onwards. There are several macro-economic reasons for the decline and there are enough reasons to believe that it will continue to decline further.

Lower Fiscal Deficit: As per the latest economic estimates, the Government is on track to meet its fiscal deficit target this financial year. Lower the fiscal deficit, lesser is the Government’s need to borrow money and hence, we can see lower yields and higher Gilt prices in the future.

Lower Inflation: Inflation has a direct impact on Gilt yields. Lower inflation will encourage the RBI to further reduce repo rates to stimulate demand in the economy. Falling crude prices have lowered Wholesale Price Inflation considerably this year. The long-term inflation target of 5% is also achievable, albeit there are certain risks of not meeting it.

Accommodative Monetary Policy Stance of RBI: The RBI is committed to reducing interest rates, to spur economic growth, provided inflation remains in check within the policy parameters. This augurs well for Gilt Fund investors in the long term, the short-term volatility not withstanding.

Indian economy is structurally strong: A number of global reports have suggested that the Indian economy is structurally strong, at a time when the global economy is going through a period of tumult. In fact, many reports from leading institutions have predicted that India will be a strong outperformer, in terms of GDP growth over the next few years. This will put lower pressure on fiscal deficit and consequently Gilt yields.

That the macros of the Indian economy are strengthening over the past few years is evidenced by the returns of Gilt Funds over the last 3 to 5 years. Top performing Gilt Funds have given excellent returns over the past three to five years.

In a nutshell

Given that there are widespread expectations for the interest rates to fall in the coming quarters, you could do well by investing in gilt funds.

But remember, you would need to move out before the rate reversal. If you are comfortable tracking and analysing the trajectory of interest rates, you can consider investing in gilt funds opportunistically. For most other retail investors who find it too difficult, other types of debt funds are a better option.

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Is Dividends from Mutual Funds a Boon or Bane?

Is Dividends from Mutual Funds a Boon or Bane?
by Priyanka Sharma 17/07/2017
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A mutual fund scheme can declare dividends only from the realised profits in its portfolio. Realised profits are the gains made by the fund manager from instruments by selling them and booking profits or when he receives dividend or interest (in the case of debt funds) from the instruments the scheme holds.

Dividend schemes can announce dividend daily, monthly, quarterly or annually as the case may be. For example, many hybrid funds or monthly income plans endeavour to give a monthly dividend to their unit holders.

For example, if you have invested in a fund at the NAV of Rs 15 and opted for dividend option. The scheme performs and after appreciation, the NAV reaches Rs 18. The fund house may decide to pay out Rs 3 as a dividend. So you receive Rs 3 and simultaneously the NAV will fall back to Rs 15. If you invest it back your NAV will go back to Rs 18.

What can you do With Dividends?

Unrealised profits or paper profit from the instruments held cannot be used to pay dividends. These profits are added to the NAV. Some part of this can be declared as dividend depending on the fund manager.

Alternatively, the fund manager could also deploy this money back in buying stocks or debt instruments in line with the scheme objectives.

When is Dividend a Boon?

Lower Risk: Financial planners recommend dividend option for conservative investors in equity for those who are risk averse and those who need some cash flows.

Regular Cash Inflow: Another case when it is useful to collect regular dividends is where you need income to meet your expenses and dividends can be a good way to achieve the same.

Tax Benefit: Dividends received from all mutual funds are tax-free in the hands of the investors. However, in the case of debt funds, the fund house pays a dividend distribution tax of 28.84% which includes surcharge and cess. In an equity mutual fund, there is no dividend distribution tax.

When is Dividend a Bane?

Reduces Investible Fund: Every time it pays out a dividend, the mutual fund reduces its own investible funds. Either it uses the cash available with it or it sells some of the investments to generate that cash and pay the dividend to you.

Eliminates Compounding Effect: As soon as the money arrives in the bank, it is out of work. It is highly possible that you will spend it. The same money, if it had stayed invested, could benefit from the power of compounding leading to a growth in the final investment corpus. As an investor, while you may feel you have gained (dividend), you are actually at the losing end.

To sum it up

Many investors opt for the dividend option in a mutual fund scheme, as it gives them intermittent cash flows, which comes handy in meeting their regular expenses.

However, when it is not required it is best to reinvest the dividend back into the fund. This is because the compounding benefit is lost when the dividend is paid unless the amount is invested immediately in a higher than equity yielding asset.

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Things to remember when investing in stock market

Things to remember when investing in stock market
by Nutan Gupta 17/07/2017
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When you think about climbing a mountain, you start with a lot of enthusiasm. However, when you realise the amount of effort that goes into it, your enthusiasm often turns into the feeling of being flabbergasted. The matter worsens when you realise that the weather conditions are about to get unfavourable for mountaineering. This is the same lifecycle of someone trying to invest. They start with a lot of enthusiasm, but when they realise that investing involves a lot of efforts, the market situation becomes unfavourable and investing requires a substantial amount of time to give considerable gains, they get overwhelmed.

Let’s revisit a few basics to remember when investing in stock market

Do not overlook the fundamentals
If you do not know the fundamentals of mountaineering, it is advisable that you know them before even thinking of setting foot on a mountain. This is true even for investing. Before investing, one needs to ensure that they have done their homework. You have to know all the basics terms and jargons of the market. Also, it is advisable that you gather information about the company you are investing in beforehand.

Set long term goals
Try to not have a prejudiced vision. Keep your eyes on the ultimate peak that you want to capture. You need to give time to reach the peak. Investing in the stock market also demands time to get you substantial gains. Occasionally, the markets could be highly volatile and your returns could be shunted as a result. Long-term investments have the prowess to unleash the true potential of interest compounding.

Understand your risk tolerance
You need to know when to back down and save yourself to give another chance at climbing the peak. You need to understand your risk tolerance. This is same when investing as well. Your risk tolerance is more psychological. However, sometimes following your heart can prove beneficial. Also, when investing, you need to limit yourself. If you don’t, there won’t be any difference between investing and gambling. If you start losing, you need to realise that you’ve reached your limits.

Buying and forgetting
Say, you’re in a situation and you are starving halfway up the peak. In these situations, you think about a power bar that could be of certain help. That’s when you remember that you did get a power bar. This was a situation of life and death. However, in the case of investing, this could be a dead investment waiting to be resurrected and resuscitated. It is advisable that you do not forget about your investments and regularly keep track of them. Ensure that you unburden the scrip at the right moment.

Not willing to book losses
It is great to be optimistic, but it pays to be realistic. When you are climbing a mountain, you need to understand if the weather conditions worsen, you need to start moving down. You cannot hope to climb and conquer the peak against all odds. That would be wonderful but highly risky. The same is the case with investing in stock market. You need to understand that if a stock is on the decline, you must not wait for too long. You should try to unburden the portfolio or re-think your strategies.

Try to not enter at peak and exit at loss
You do not start from the top and reach the bottom and get the glory. There is no glory in it. Similarly, if you enter a stock when it’s at its peak and exit when it’s losing, you suffer losses and not gains.

Ensure that you NOT follow the tips to the T
All the training that you’ve had helps you when you are trying to conquer a peak. However, your basic instincts up there ought to be your best friend. When investing as well, expert advice is good to listen to, but it must not always be followed. Take everyone’s suggestions but follow what you feel is right. Follow your experience and your training, and follow the advice only if you feel that it’s the correct option for you. Occasionally, the expert could also have an ulterior motive that you might be unaware of.

Unsupervised trading
When you get equipment for your mountain trip, you do not just blindly trust the vendor. You double verify the equipment. Similarly, you don’t put all your finances in the hands of your broker. You do not let your broker trade on your behalf. It is advisable that you keep a track of all the trading that your broker does and ensure that he follows you and not the other way round.

Do not put all your eggs in one basket
Up there, you do not want to be found without a spare bottle of oxygen. Thus, you strategically place them to ensure that they be of help when needed. When you are investing, you do not want to invest in just one sector or portfolio. You would want to diversify your investments. This will ensure that market volatility and other factors like inflation do not give you stunted returns.

Avoid Leveraged money
You do not climb mountains with borrowed money and neither should you invest in stock market. If things do not go the way you planned, there is a chance that you might fall into a debt trap. You must always invest using the money that you have to spare. This way you can ensure that the lifestyle that you’re habituated to doesn’t get disrupted if you suffer a loss.

To sum it up

Investing in stock market is subject to market risk. Read this document and many others before investing. However, do not be afraid when investing. Just follow the adage, prevention is better than cure and you will be able to conquer the peaks that only a handful have conquered before you.

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5 Stocks Recommendation For Feb 25th, 2019 – Mar 1st , 2019

Stock recommendations
by Gautam Upadhaya 21/07/2017

1) Balkrishna Industries Ltd - Buy

 

Stock Balkrishna Industries Ltd
Recommendation The stock has witnessed a breakout from its sideways consolidation
backed by an uptick in volumes on the daily chart. It has also shown
positive momentum on the daily MACD-Histogram, an indication that
the uptrend will continue in the short term.
Buy/Sell Range Target Stop Loss
Buy (Cash) Rs850-855 Rs892 Rs827
NSE Code Market Cap (in Rs cr) 52-week high/low 200-Day EMA
BALKRISIND 16543 Rs1467/741 Rs987

 

2) REC Ltd - Buy

 

Stock REC Ltd
Recommendation The stock has witnessed a consolidation breakout backed by an uptick
in volumes on the weekly chart. Derivative data indicates fresh long
positions in the stock.
Buy/Sell Range Target Stop Loss
Buy (Cash) Rs131-133 Rs139 Rs127.8
NSE Code Market Cap (in Rs cr) 52-week high/low 200-Day EMA
RECLTD 26068 Rs148/89 Rs119

 

3) Mahindra & Mahindra Ltd - Buy

 

Stock Mahindra & Mahindra Ltd
Recommendation The stock has witnessed a rounding bottom formation and has managed
to close above its 10-DEMA, short-term resistance level on the daily charts.
It has also formed a bullish hammer candlestick on the weekly charts.
Buy/Sell Range Target Stop Loss
Buy (Cash) Rs641-647 Rs672 Rs625
NSE Code Market Cap (in Rs cr) 52-week high/low 200-Day EMA
M&M 80272 Rs992/615 Rs771

 

4) Raymond Ltd - Buy
 

Stock Raymond Ltd
Recommendation The stock has witnessed a breakout above its resistance levels backed by an uptick in volumes on the daily charts. It has also shown strong momentum on the daily MACD-Histogram.
Buy/Sell Range Target Stop Loss
Buy (Cash) Rs721-728 Rs755 Rs705
NSE Code Market Cap (in Rs cr) 52-week high/low 200-Day EMA
RAYMOND 4478 Rs1151/593 Rs806

 

5) HDFC Bank Ltd - Sell

 

Stock HDFC Bank Ltd
Recommendation The stock has formed a bearish engulfing candlestick pattern backed by an uptick in volumes on the daily chart. Derivative data indicates fresh short positions in the stock.
Buy/Sell Range Target Stop Loss
Sell (March Futures) Rs2105-2120 Rs2030 Rs2164
NSE Code Market Cap (in Rs cr) 52-week high/low 200-Day EMA
HDFCBANK 569029 Rs2219/1830 Rs2041

 

Research Disclaimer

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Short Put Options Trading Strategy

Short Put Options Trading Strategy
by Nilesh Jain 02/08/2017

What is short put option strategy?

A short put is the opposite of buy put option. With this option trading strategy, you are obliged to buy the underlying security at a fixed price in the future. This option trading strategy has a low profit potential if the stock trades above the strike price and exposed to high risk if stock goes down. It is also helpful when you expect implied volatility to fall, that will decrease the price of the option you sold.

When to initiate a short put?

A short put is best used when you expect the underlying asset to rise moderately. It would still benefit if the underlying asset remains at the same level, because the time decay factor will always be in your favour as the time value of put will reduce over a period of time as you reach near to expiry. This is a good option trading strategy to use because it gives you upfront credit, which will help to somewhat offset the margin.

Strategy Short Put Option
Market Outlook Bullish or Neutral
Breakeven at expiry Strike price - Premium received
Risk Unlimited
Reward Limited to premium received
Margin required Yes

Let’s try to understand with an Example:

Current Nifty Price 8300
Strike price 8200
Premium received (per share) 80
BEP (strike Price - Premium paid) 8120
Lot size 75

Suppose Nifty is trading at Rs. 8300. A put option contract with a strike price of 8200 is trading at Rs. 80. If you expect that the price of Nifty will surge in the coming weeks, so you will sell 8200 strike and receive upfront profit of Rs. 6,000 (75*80). This transaction will result in net credit because you will receive the money in your broking account for writing the put option. This will be the maximum amount that you will gain if the option expires worthless. If the market moves against you, then you should have a stop loss based on your risk appetite to avoid unlimited loss.

So, as expected, if Nifty Increases to 8400 or higher by expiration, the options will be out of the money at expiration and therefore expire worthless. You will not have any further liability and amount of Rs. 6000 (75*80) will be your maximum profit. If Nifty goes against your expectation and falls to 7800 then the loss would be amount to Rs. 24000 (75*320). Following is the payoff schedule assuming different scenarios of expiry. For the ease of understanding, we did not take into account commission charges and Margin.

Short Put Options Trading Strategy

Analysis of Short Put Option Trading Strategy

A short put options trading strategy can help in generating regular income in a rising or sideways market but it does carry significant risk and it is not suitable for beginner traders. It’s also not a good strategy to use if you expect underlying assets to rise quickly in a short period of time; instead one should try long call trade strategy.

 

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Cash and Carry Arbitrage

Cash and Carry Arbitrage
by Nilesh Jain 05/08/2017

Arbitrage: Arbitrage is the process of simultaneous buy and sale of shares in order to profit from difference in the price of underlying assets. It is the process of exploiting risk free return which arises due to price differences. Arbitrage opportunity exists because of market inefficiencies.

Cash And Carry: Cash and Carry arbitrage is a combination of long position in underlying assets and short position in underlying futures. Cash and carry arbitrage occurs when market is in "Contango", which means the future prices of an underlying asset are higher than the current spot price. To initiate cash and carry arbitrage, the difference between spot price and future price should be reasonably high enough to cover transaction cost, financing cost as well as to earn profit. As expiration date approaches nearby, prices of spot and future converge and liquidation of position can be done at that time.

In order to exploit the risk free return, the arbitrageur/ trader will have to carry the asset until the expiration date of future contract. Therefore, this strategy would be profitable only if the cash flow from future at expiration exceeds the acquisition cost and carrying cost on long asset position.

Let’s try to understand with the help of example of DHFL.

Cash market price (as on 25th April 2017) (S)

Rs 422

June Futures (Expiry on 29th June 2017) (F)

Rs 430

Contract size

3000

Fair value is measured by the formula

F= S*(1+R)^n

Rate of Interest

9% (p.a.)

Time to expiry (n)

65 days

Amount borrowed

Rs 12,66,000 (422*3000)

Cost of Borrowing {0.09*(65/365)}

1.6%

Basis

Future price-spot price

Expected future price (F) = 422*(1+9%) ^(65/365)

Therefore, in above case F= 428.53

Current future price= 430

Hence, we can see that there is an arbitrage opportunity.

Risk free Arbitrage = Rs 1.47 (430-428.53)

To take the advantage of this mis-pricing, an arbitrageur/ trader may borrow Rs 12,66,000 at an interest rate of 9% p.a. and buy 3000 shares of DHFL in cash market at Rs 422 and sell 1 lot of DHFL Futures contract at Rs 430.

Cost of borrowing in Rs [(1266000)*(9%*(65/365))]= 20,291

Gains from price difference between futures and spot= Rs 24,000

This would result in to net arbitrage opportunity of Rs 24,000-20291= Rs 3,709

Scenario analysis:

Case 1: DHFL rises to 435, at expiry

Profit on underlying (cash) = (435-422)*3000= Rs 39,000

Loss on futures = (435-430)*3000= (Rs 15,000)

Gross Gain on Arbitrage= Rs 24,000

Cost of borrowing: Rs 20,291

Net gain from arbitrage: Rs.3,709.

Case 2: DHFL falls to 415, at expiry

Loss on underlying (cash) = (422-415)*3000= (Rs 21,000)

Profit on Futures= (430-415)*3000= Rs 45,000

Gross Gain on Arbitrage= Rs 24,000

Cost of borrowing: Rs 20,291

Net gain from arbitrage: Rs.3,709.

To round up, in any cash and carry arbitrage, the moment you lock in your position, your profit is fixed depending upon the arbitrage opportunity. This is also called risk free arbitrage because your profit is secured irrespective of underlying price movement.

Whenever futures are trading at a substantial discount to spot, a reverse cash and carry arbitrage opportunity arises.