How a SIP works more for you than an EMI?

How a SIP works more for you than an EMI?
by Nutan Gupta 21/06/2017
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With increasing space and time crunch in cities and suburbs, four walls and a roof for a sound sleep is what a common man yearns for. The want for having something that is yours is fairly justified. A young investor buys a home for his family and acquires a vehicle to drive around, mostly covered by a loan with an EMI (Equated Monthly Installment). But, EMIs are potentially detrimental to one's mental satisfaction. Also, there are other schemes that provide a much better rate of return than the asset acquired under an EMI.

One scheme that could work in your favor, more than an EMI does, is the SIP. SIP (Systematic Investment Planning) is nothing but a specified amount that is invested in a scheme for a continuous time period, at regular intervals.

Analyzing the Idea

The fundamental here is clear and simple; EMI is negative compounding, while SIP is positive compounding. For starters, it is to be understood that towards the end of your loan EMI period (which is usually a few years), you actually end up paying a significant amount more than what the asset's actual worth was. The difference in between both these investment systems can be elaborately explained by a simple example.

Let us imagine you have an EMI tenure of 20 years, of which Rs 20,000 is your EMI. Also, assume that the loan amount would be 80% of the house's purchase price (20% down payment by the buyer), all at an interest rate of 10.5%. Calculating, we see that the interest payable goes up to Rs 27,90,000. The total payable amount, against the Rs 20 lakh loan amount, shoots up to a significant Rs 47,90,000. Basically, one is paying back more than double of what he's borrowing. Taking in all the aspects, assume the value of the asset 20 years later may be somewhere around 5 times the current value, which would be Rs 1.25 crore.

In an alternative scenario, you decide to invest your money in SIP. Let us say you live in a rented flat costing you Rs 9000 rent per month. Comparing with the provisions above, you would still have Rs 11,000 to invest in a SIP. Assume that the general inflation rate of 6-7% and the increasing rent is checked by other factors. At an expected return of 15%, calculations for the period of 20 years showcase the return to be Rs 1.7 crore. Against the invested Rs 26.4 lakh, your net wealth gain will be Rs 1.4 crore (excluding rent payment of the rented flat).

 

Asset Bought Through Loan

SIP

Down Payment

Rs 5 lakh

-

Monthly Installments

Rs 20,000

Rs 11,000

Loan Amount

Rs 20,00,000

-

Rent

-

Rs 9,000 (with 5% yearly increment)

Total Investment

Rs 52,90,000

Rs 48,75,000 (Including rent payment of the rented flat)

Expected Rate of Return

Five times the current value

15%

Returns After Time Period

Rs 1.25 crore

Rs 1.7 crore

Observed Wealth Gain

Rs 72,10,000

Rs 1,21,25,000

Summing It Up

The table above speaks about SIP and its benefits at a length. The observed wealth gain does show a huge gap in investment through SIP and asset bought through loans. It would, hence, seem wiser to be on the more patient side. With a longer term vision, SIPs provide unmatchable returns, which would further help you once you enter the post-retirement stage.

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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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Reverse Cash and Carry arbitrage

Reverse Cash and Carry arbitrage
by Nilesh Jain 05/08/2017

Reverse Cash and Carry arbitrage is a combination of short position in underlying asset (cash) and long position in underlying future. It is initiated when future is trading at a discount as compared to cash market price. In other words, the cash market price is trading higher as compared to future. The arbitrageur/ trader can take position by selling his delivery of stocks in cash and simultaneously buying futures of same underlying assets of equal quantity. A trader must have delivery in that particular stock when there is such an opportunity available in the market.

Reverse cash and carry arbitrage occurs when market is in "Backwardation", which means future contracts are trading at a discount to the spot price.

Let’s try to understand with the help example of CEATLTD as on 26th APRIL 2017:

As we can see in the above illustration from 5paisa terminal there was a price difference between cash market price and May futures price of Rs 60.

Cash market price (as on 26th April 2017) (S)

Rs 1570

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

Rs 1510

Contract size

700

Rate of Interest

9% (p.a.)

Time to expiry (n)

29 days

Amount received from selling Delivery of CEAT

Rs 10,99,000 (1570*700)

Margin required to sell futures

Rs 1,37,595

Free cash available

Rs 9,61,405

Fair value is measured by the formula

S= F/(1+R)^n

Lending rate

0.72%

Basis

Spot price-Future price

Free cash available to lend will be Rs 10,99,000 - Rs 1,37,595 = Rs 9,61,405

Gain from amount lend is Rs 6,874.71 (9,61,405*(0.09^(29/365)))

S= 1510/(1+0.09)^(29/365)

Fair Value of spot price (S)= 1500

Current spot price= 1570

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

Risk free Arbitrage=Rs 70 (1570-1500)

To take advantage from this mispricing, trader/arbitrageur will buy futures at Rs 1510 and sell CEATLTD in cash market at Rs 1570. This would result in gross arbitrage profit of Rs 42,000 (60*700). And income received from lended amount would be Rs 6874.71, so Net arbitrage profit would be Rs 48,874.71.

Scenario analysis:

Case 1: CEATLTD rises to 1620, at expiry

Loss on underlying (cash) = (1620-1570)*700= (Rs 35,000)

Profit on futures = (1620-1510)*700= Rs 77,000

Gross Gain on Arbitrage= Rs 42,000

Inflow from lending: Rs 6874.71

Net gain from arbitrage: Rs 48,874.71

Case 2: CEATLTD falls to 1450, at expiry

Profit on underlying (cash) = (1570-1450)*700= Rs 84,000

Loss on Futures= (1510-1450)*700= (Rs 42,000)

Gross Gain on Arbitrage= Rs 42,000

Inflow from lending: Rs 6874.71

Net gain from arbitrage: Rs 48,874.71

To round up, in any reverse cash and carry arbitrage, the moment you trigger this arbitrage, 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 future price of an underlying asset are higher than the current spot price, a cash and carry arbitrage opportunity arises.

Next Article

Bear Call Option Trading Strategy

Bear Call Option Trading Strategy
by Nilesh Jain 05/08/2017

What is a Bear Call Spread Option strategy?

A Bear Call Spread is a bearish option strategy. It is also called as a Credit Call Spread because it creates net upfront credit at the time of initiation. It involves two call options with different strike prices but same expiration date. A bear call spread is initiated with anticipation of decline in the underlying assets, similar to bear put spread.

When to initiate a Bear Call Spread Option strategy?

A Bear Call Spread Option strategy is used when the option trader expects that the underlying assets will fall moderately or hold steady in the near term. It consists of two call options – short and buy call. Short call’s main purpose is to generate income, whereas higher buy call is bought to limit the upside risk.

How to construct the Bear Call Spread?

Bear Call Spread can be implemented by selling ATM call option and simultaneously buying OTM call option of the same underlying assets with same expiry. Strike price can be customized as per the convenience of the trader.

Probability of making money

A Bear Call Spread has a higher probability of making money. The probability of making money is 67% because Bear Call Spread will be profitable even if the underlying assets holds steady or falls. While, Bear Put Spread has probability of only 33% because it will be profitable only when the underlying assets fall.

Strategy

Sell 1 ATM call and Buy 1 OTM call

Market Outlook

Neutral to Bearish

Motive

Earn income with limited risk

Breakeven at expiry

Strike Price of short Call + Net Premium received

Risk

Difference between two strikes - premium received

Reward

Limited to premium received

Margin required

Yes

Let’s try to understand with an example:

Nifty Current spot price (Rs)

9300

Sell 1 ATM call of strike price (Rs)

9300

Premium received (Rs)

105

Buy 1 OTM call of strike price (Rs)

9400

Premium paid (Rs)

55

Break Even point (BEP)

9350

Lot Size

75

Net Premium Received (Rs)

50

Suppose Nifty is trading at Rs 9300. If Mr. A believes that price will fall below 9300 or holds steady on or before the expiry, so he enters Bear Call Spread by selling 9300 call strike price at Rs 105 and simultaneously buying 9400 call strike price at Rs 55. The net premium received to initiate this trade is Rs 50. Maximum profit from the above example would be Rs 3750 (50*75). It would only occur when the underlying assets expires at or below 9300. In this case both long and short call options expire worthless and you can keep the net upfront credit received. Maximum loss would also be limited if it breaches breakeven point on upside. However, loss would also be limited up to Rs 3750(50*75).

For the ease of understanding, we did not take in to account commission charges. Following is the payoff chart and payoff schedule assuming different scenarios of expiry.

The Payoff Schedule:

On Expiry Nifty closes at

Net Payoff from Call Sold 9300 (Rs)

Net Payoff from Call Bought 9400 (Rs)

Net Payoff (Rs)

8900

105

-55

50

9000

105

-55

50

9100

105

-55

50

9200

105

-55

50

9300

105

-55

50

9350

55

-55

0

9400

5

-55

-50

9500

-95

45

-50

9600

-195

145

-50

9700

-295

245

-50

9800

-395

345

-50

Bear Call Spread’s Payoff Chart:

Impact of Options Greeks:

Delta: The net Delta of Bear Call Spread would be negative, which indicates any upside movement would result in to loss. The ATM strike sold has higher Delta as compared to OTM strike bought.

Vega: Bear Call Spread has a negative Vega. Therefore, one should initiate this strategy when the volatility is high and is expected to fall.

Theta: The net Theta of Bear Call Spread will be positive. Time decay will benefit this strategy.

Gamma: This strategy will have a short Gamma position, so any upside movement in the underline asset will have a negative impact on the strategy.

How to manage Risk?

A Bear Call is exposed to limited risk; hence carrying overnight position is advisable.

Analysis of Bear Call Options strategy:

A Bear Call Spread strategy is limited-risk, limited-reward strategy. This strategy is best to use when an investor has neutral to bearish view on the underlying assets. The key benefit of this strategy is the probability of making money is higher.

 

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IPO Note - HUDCO

IPO Note - HUDCO
IPO
by Nutan Gupta 05/08/2017

Issue Opens - May 8, 2017

Issue Closes - May 11, 2017

Price Band - Rs. 56-60

Face Value - Rs. 10

Issue Type - 100% book building

% Shareholding

Pre IPO

Post IPO

Promoter

100.0

89.8

Public

0.0

10.2

Source: DRHP

HUDCO is a wholly-owned government entity with more than 4 decades of experience in providing loans for housing and urban infrastructure in India. It has an outstanding loan portfolio of Rs.36,386 cr (as on 9MFY17), which can be divided into– Housing Finance (30.86%) and Urban Infrastructure Finance (69.14%).

The offer consists of Offer for sale (OFS) of up to 204.1 mn equity shares for disinvestment by the government and employee reservation is up to 3.9 mn shares. There is a discount of Rs. 2 per share for eligible employees and retail investors.

Key Investment Rationale

HUDCO currently focuses on the low income group or the economically weaker sections for housing finance and social housing. The company’s housing finance loan book has grown at a CAGR of 21.9% over FY14-16. This segment has better NIMs and lower gross NPAs @ 3.08% (8.46% for urban infrastructure). There is an increasing demand for housing loans from Tier II/III cities. Deployment of funds towards housing loans by banks and HFCs has increased over the years.

The HUDCO Board decided to stop sanctioning new Housing Finance loans to private sector entities in FY14 in order to reduce NPAs from the private sector. As on December 31, 2016, its gross NPAs for loans made to the private sector (excluding loans given to individuals) were 5.98% compared to 0.75% for loans to state governments. Furthermore, the management decided to stop sanctions of new Urban Infrastructure Finance loans to the private sector. Since 2014, state governments and their agencies represent 99.94% of the total sanctions. As a result, net NPAs have decreased from 2.52% in FY14 to 1.51% in 9MFY17.

The issue is attractively priced at 1.4x9MFY17 P/Adj.BV (upper band price).

Risks Involved

HUDCO’s loan growth may be restricted by a slowdown in real estate and increasing competitive intensity. Also, the company faces general business risks of providing organized finance to LIG and EWS and competitive pricing of HFCs as compared to banks.