We are having many options for Investment in the equity market. Most of them vanish our wealth drastically when the market falls. Hence, we come with Index Long Term Strategy. Here, we invest in Nifty50 Index, take leverage through Futures and hedge with Options so that our wealth grow with market growth and get secured against market falls. Let’s understand each elements of Index Long Term Strategy one by one.
The National Stock Exchange has listed 2100+ companies. Nifty50 is a weighted average of top 50 companies on NSE. Hence, we can ensure that our wealth will never become zero if we invest in Index.
Secondly, these top 50 companies and their weightage are decided based on their free-float market capitalization. Whichever company has the highest market capitalization, will get the highest weightage in nifty50 index. Whenever the price of the stock in index falls, the market cap falls and weightage also falls in index. Once the stock falls to 51st number, it will get removed from the index and the next company enters in the company. This mechanism ensures that the index is always a growing asset.
Nifty50 has given the following performance since 2003.
We purchase Nifty ETFs for Investing in Nifty50 Index
No. We will invest in Nifty ETFs
Logically, No. Because it is a portfolio of Top 50 Companies in India on the basis of free-float market capitalization.
Yes. Because it caries the highest volume in the market.
No. There is no lock-in period. You can enter or exit at anytime.
Though we understand that Nifty never becomes zero, it is having a heavy rise and falls. If we don’t hedge it against the market falls, we may lose a good amount of wealth in the bearish market. Hence, we come with the hedging of our investment in Index through Put Options. It simply works like car insurance or medical insurance. If the Index falls, Put Option will give us a profit with an exact amount of loss we made in investment. Our maximum loss will be the premium of put option only if the Index falls drastically or remains at the same level.
We purchase Put Options for hedging purpose. The strike, expiry and the quantity of the Put Option depend on various aspects like the quantity of equity, the volatility of the market, time of entry etc. But we take 100% hedging so that none of our position gets unlimited loss in the bearish market.
Generally, Hedging cost for 1 year is around 5% only. E.g. If Nifty is running at 10000, then the hedging cost for 1 year is around Rs. 500. If we purchase both then our purchase value will be around Rs.10500. This extra Rs. 500 gives us the surety that our portfolio will never lose more than Rs. 500. Hence, if we invest Rs.1 Crore, our portfolio will not falls below Rs 95 Lacs in any worst market scenario. Let’s understand it with some brief example.
In the above example, we invest Rs. 1 Crore in the year 2020 at Nifty level of 10,000 and purchase the hedging worth Rs. 5 lacs separately. Market reaches 12000 in 2021 and our fund value also raise to Rs. 1.2 crores. We again pay 5% hedging cost which is Rs. 6 lacs. Very Next year in 2022, the market falls drastically and reaches to the level of 8000. Here, We will lose Rs. 40 lacs in our portfolio but, at the same time, we will also receive Rs. 40 lacs from the hedging. We again pay Rs. 6 lacs as hedging cost. Hence, our portfolio remains the same as Rs. 1.20 crores. Nifty again reach to 12000 in 2023 and, this time, our fund started rising from Rs. 1.20 crores and reaches to Rs. 1.80 crores. Now we need to pay Rs. 9 Lacs (5% of fund value) as hedging cost. In 2024, the market again falls and close at level 10,000. This time again we recover our loss from hedging and fund value remains the same at Rs 1.80 Crore. If we square off the position and deduct all the hedging cost, our net fund value will be Rs. 1.54 crore.
Hence, Nifty remains at the same level of 10000 after 4 years but our fund of Rs. 1 crore become Rs. 1.54 Crores.
The above is a hypothetical example. Let’s see the actual benefit of hedging. In the past 17 years, Nifty gave 12 times returns while the strategy gave 17 times returns. On other hand, Nifty shows the highest risk of 52% while the strategy never shows more than 5% risk on fund value. Hence, this strategy becomes a myth breaker.
MYTH: High Risk = High Returns
TRUTH: Smart Calculation = High Returns
Yes. Hedging provides safety of our fund and opportunity to grow further.
No. It depends upon the options premium
No. Looking at the past behaviour of the Index, it seems fairly priced.
Yes. You can exit anytime.
NSE (National Stock Exchange) provides the hedging.
Leverage is an investment strategy of using borrowed money. In Index long term strategy, we took leverage by pledging our equity portfolio so that we can boost our profit. We took leverage and put our money in debt funds because here leverage cost is lower than the debt returns. Let’s understand how it works.
Here, in an example of Rs. 1 Crore portfolio, we divide our investment into two parts.
Let’s understand step by step the whole strategy.
1. 30 Lacs in Equity: We will purchase Nifty ETFs from Rs. 30 Lacs and put them on collateral so that we can get margin in F&O Segment. We will purchase Futures worth Rs. 70 Lacs from this margin. Hence our Total exposure will become 1 Crore.
2. Cost of Strategy: We will have two costs to run this strategy.
Hence, our gross annual cost will be Rs. 8.5 Lacs which is 8.5% of our exposure value. But this cost gives us two facilities. 1. our whole portfolio is secured now. 2. We also get low-cost finance for our investment.
3. 70 Lacs in Debt: We will park rest 70 Lacs in debt funds from where we can get annual interest around 7%. Hence, we will earn around Rs. 5 Lacs from interest income.
This income from interest reduces our annual cost. Our Net annual cost will be around 3 to 4 lacs only. i.e. 3 to 4% of our exposure value.
Yes. Leverage can generate good returns.
No. It depends upon various factors like Rate of Interest, Cost of carry, demand, supply etc.
No. Compare to the current prevailing rate, we get lower financing cost.
No. you can choose the Relax Plan if you don’t want to use leverage.
Yes. You can use them as colleteral.
NSE (National Stock Exchange) provides Futures.
* Our product Index Long Term Strategy has delivered an 18.90% CAGR since 2002. with a maximum annual risk of 4%. The maximum annual return we gain is 72%. Rs. 1 Crore invested with Index Long Term Strategy in 2002 became Rs. 26.89 Crore in 2021.
*Please note: The given calculation is for illustration purpose only. This performance may or may not be sustain in future and should not be used as a basis for comparison with other investments. The calculation mentioned above is only for the purpose of explaining the concept and should not be construed as recommendations from Finideas Investment Advisor.
All the cost included here.
No. This performance does not include the tax calculation.
We are charging our Semi-Annual Maintenance cost on exposure value.
*GST Extra || **Charges for 6 Months
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