Over 90% of personal savings in India are parked in fixed income investments. The interest rates offered by such investments sedom cross 10% per annum. Although returns from equity markets are several basis points more than that of fixed income securities, people are scared to invest in equity or equity related products out of their perceived liquidity problem and volatility in returns.
Given this backdrop of equities suffering from poor liquidity (to exit without loss when money is needed) and high degree of volatility in returns, there would be enough appetite if a product, built with equities could address both these issues convincingly and is backed by back testing results as well as live data. Vivekam took up the task of designing such a product for the benefit of clients and came up with a product called NIFTY FLOATER.
NIFTY FLOATER is a product that reduces volatility in returns to a great extent and turn it in favour of investor. The issue of liquidity is also addressed by providing a mechanism to withdraw all the amount invested (together with profit) with least risk to the capital, once every month on a stated date. The broad approach observed by Vivekam in designing the NIFTY FLOATER may be summarised as below.
Proposed investment is leveraged 3 times to increase the return on investment.
Vivekam picks the best five stocks out of nifty 50 shares to construct a portfolio. All these stocks are assigned equal amounts to the extent possible. Following picture displays how an investment of 25 lacs is deployed among various stock futures in their market lots.
After the portfolio is built, using Vivekam’s tools, beta for the portfolio is calculated. Multiplying the portfolio value with beta we can ascertain the value of index to be used as a hedge for the portfolio.
To protect the downside in portfolio, Vivekam suggests to pick an appropriate put option on nifty. This will help recover the losses in portfolio, should the prices drop after we buy them.
To recover the cost of put options on nifty, call options on individual stocks are sold. It is a known fact that individual options on stocks are expensive when compared to options on index.
On most trading days, the difference between call options on individual stocks and put options on index ranges anywhere between 1.5% to 3%.
Because of leverage of three times observed in investment a return of 4.5% to 9% is possible theoretically. Depending on the strike price chosen for selling call options and for buying nifty put options the range may be narrower or wider.
By adopting the aforementioned logic, a client is likely to earn the stated return if the prices do not move up or down. This is because call option premium collected is more than put option premium paid. With no change in prices, there may not be any profit or loss on stocks or on nifty. Hence all that extra premium collected will be profit.
If the prices of stocks drop and so is index, since the portfolio is properly hedged with nifty put options, the loss suffered on stock futures should be compensated by the profit in nifty. This will leave the difference between call option premium collected and put option premium paid with the client.
Is the prices rise, the profit in futures cannot be enjoyed by investor since call options are sold limiting his upside only to call option premium collected. In this scenario also investor is likely to be left with difference between call option premium collected and put option premium paid because put options will be worthless.
The only instance where the client may suffer loss is when stock prices drop while index stays put at the initial level or rises. In our back testing of eight years data, such a situation arose in 12 months out of 96 months. In all other months, the hypothesis held true throwing a big opportunity for investors to benefit. The average CAGR noticed in this product after all the charges was 51% per annum.
This product, offering disproportionately higher returns compared to the associated risk, has attracted several investors and the returns earned by several of them are presented hereunder. This product has been adopted by several clients for the past 5 months with highly encouraging results. It continues to promise enhanced returns on investment than any other comparable fixed income investments. We are pleased to publish the results of this product for the past four months hereunder.
For the sake of confidentiality, names of the clients and their codes have been partly hidden.
The above table, for the period June to July 2014, shows the result of investments by 15 clients who earned an average return of 1.70% per month. The return was low in this month because a large investor with 504 lacs earned a negative return of 0.12%. Otherwise, the returns ranged between 1.10% and 8.41% per month.
The about able was the result of 17 accounts for the period July to August 2014. The minimum return earned by a client stood at 1.99% per month while the maximum and was at 9.17% per month. The average returns stood at 4.7%.
The above table shows the returns for the period August to September 2014. Here again there were clients who earned a return of 5.98%, 5.87% and 5.86% per month. The lowest return earned by a client was at 0.55% per month. The average return earned by all the clients for this period was 3.83% per month.
The above table shows the returns of some clients as on date for the period September to October 2014. The returns averaged 2.44% when all accounts were considered together. Among them there were clients losing upto 1.25% and those earning up to 4.06% per month on their investments.
The final result for the period September to October may undergo a change based on price behaviour in the coming days. However, given the back testing data, we are confident that investors will have a last laugh this month too and will earn decent income on their investments.
Moderation of risk is in our hands and the returns are hidden in the market place. It is only for those who learn to moderate the risk in right proportions that the returns become a reality. NIFTY FLOATER is a product for the investors who are tired of meagre returns on their liquid wealth for unduly longer periods. Those using this product for 6 months will surely be cursing themselves for having stayed away from this product for this long, in their life. Interested parties, querists and skeptics are welcome to write to firstname.lastname@example.org for further details.