Wondering What You Can Do Differently With Your Portfolio? Check Here
You are probably wondering what happened to your well planned life 2 months back. Something unexpected hit your portfolio and you don’t know how long this will last. If you want to get out of this mindset to your usual happy and driven self read on. There are strategies which work in stressed times like these and help in coming out of the pit faster.
There are 2 parts to this,One part is the short term and the other the medium term.
As of now income levels are falling or close to half if not zero as is the case with many people.Your passive incomes including rents are being delayed.Your fixed deposits if you have on a post tax basis make you feel that it was not a wise decision.
Would’nt you like something which delivers six –six and a half percent post tax.Is not impacted by volatility or credit risks and is liquid all the time? Probably an answer you are looking for.It comes under the category of Arbitrage funds. This category does better in volatile markets like these. If volatility increases the returns increase.If it decreases it might come down marginally.
Arbitrage is the difference between cash and futures of a particular security.It takes advantage of the mispricing in the market.There is no downside in terms of losing capital,however this is a return and not interest.It depends on the spread between cash and futures price of a security.
Lets take an example.Say Sbi share price is 161 rupees and sbi futures is 162 rupees for the month of may,the spread is 0.5% per month or a little more.Now if sbi futures was 161.5 it would have been a return of 2.5% on a annualized basis.However volatility levels vary every month and in times like these can even go upto 10% per annum on a gross basis and 9% on a net basis as was seen in 2008-9.
If you don’t want to take a risk liquid take funds could be thought of .They invest in AAA paper which is a tenor of upto three months. Even if a default happens most allocations are less than 1% to a particular category. Most companies which have achieved this rate of borrowing at 6-6.5% will not default as it is the lowest cost source of funds available externally and if a default happens then the company most likely will never rise again. Most debt oriented funds are looking at AAA/AA+ paper which is safest paper as these companies have reserves and goodwill built over the years.
The other options are overnight funds. Like the name suggests it invests for a day in these AAA companies. Returns are likely in the region of 4-5percent at a pretax level as interest rates have been reduced by RBI.
There are three scenarios as an investor. The conservative one is 100% overnight funds.A moderate one is 50 % liquid funds,25% overnight funds and 25% arbitrage funds.A slightly risk oriented approach is 50% liquid/50% arbitrage funds. This is relevant for the first 12 months of expenses .This buffer helps to tide over the crisis at hand whether you are working in a corporate, are a professional or an entrepreneur or an industrialist.
Opportunities depend on the market cycle as well as your risk taking capacity.Given the current situation till we see at least 1-2 months of work happening at the ground level without any further lockdowns,we don’t see a situation wherein demand normalizes to previous levels.99% of businesses are not geared to work on this situation as per a survey done for IMCCI by Avalon consulting.
Looking at different sectors Fmcg ,pharmaceuticals, healthcare are likely to see faster recovery. IT/Digital service providers are among those likely to benefit from this new way of working.Aviation/hotels/Financial institutions and tourism are likely to recover once things stabilize in a couple off quarters.
Inflationary pressures are likely to remain in a predictable range if the monsoon is near normal. As per IMD Monsoon is likely to be delayed by 4 days.This would enable Government to look at taking additional measures without taking more debt which will impact our countries rating which is critical to keep our import bills lower.
Lets imagine the situation once the vaccine is available. Markets worldwide will start discounting the future and we are likely to see a V shaped recovery.
In the interim however long short strategies are a tested way to experience real gradual growth when markets are in a downward trend.These strategies can be aggressive or conservative depending upon the manufacturer.The benefit of these strategies is that they reduce the portfolio risk considerably. Also, they deliver better returns than the arbitrage/liquid fund combination.
Think differently. Stay ahead.
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