Category: Investing Insight

Investing insight to make you a better investor.

The Non-Existent ETF Volumes

shyam July 19, 2015

ETFs don’t trade in India

The NIFTYBEES ETF – an ETF that is indexed to the NIFTY – has less daily volume than RELIANCE. Median daily volumes of NIFTYBEES is around 31,000 whereas RELIANCE sees more than 3161,000.

NIFTYBEES:

RELIANCE:

In spite of paying dealers to provide liquidity

The NSE introduced a Liquidity enhancement scheme (LES) for market making in equity exchange traded funds (ETFs) effective from December 15, 2014 till February 28, 2015. It was then extended to June 30, 2015 (see appendix). The results have been mixed.

BANKBEES:

JUNIORBEES:

M100:

Daily volumes of M100 went down during the program. Here is the full list, volumes in ‘000s:

The program might have resulted in tighter bid-ask spreads but there was no surge in volumes. Retail investors remain disinterested in ETFs.

Appendix

Categories Investing Insight, Your Money Tags ETF

Are Dividends Anti-Shareholder?

shyam July 19, 2015

Dividends vs. Buy-backs

When firms are left with excess cash, they have the option of distributing money back to shareholders by either issuing dividends or buying back their stock.

All things being equal, investors should be indifferent whether a company pays dividends or engages in a buy-back.

The dividend irrelevance argument

The underlying intuition for the dividend irrelevance proposition is simple. Firms that pay more dividends offer less price appreciation but must provide the same total return to stockholders, given their risk characteristics and the cash flows from their investment decisions. Thus, there are no taxes, or if dividends and capital gains are taxed at the same rate, investors should be indifferent to receiving their returns in dividends or price appreciation. (Source: NYU)

Indian Taxes

In India, long-term capital gains in equity investments attract zero tax. Long-term is one year. However, there is a dividend distribution tax of around 28%. So if a company decides to pay Rs. 100 in dividend, only Rs. 72 reaches the shareholder.

In this scenario, companies that declare dividends are taking a step that is against the interests of the share-holder. Investors are better off if the company buys back stock from the open market instead.

Here are some of the largest dividend payers:

	2015	2014
TCS	17020.50	5480.10
INFRATEL	1682.20	566.60
VEDL	3106.30	2214.40
ITC	4875.60	4238.60
WIPRO	2949.00	2327.30
HDFC	2505.90	1939.90
HINDUNILVR	2918.90	2495.60
TECHM	549.60	135.90
ICICIBANK	3084.10	2704.00
HINDZINC	1878.50	1532.50

The figures are in Rs. crores and nearly 1/3^rd of this goes to the tax-man.
One wonders if these companies are working for the Indian government instead of the shareholder.

Conclusion

Small investors and fund managers should demand that the boards consider buy-backs over dividends.

Categories Investing Insight, Your Money Tags investing

Relative Returns of Midcap Funds

shyam July 17, 2015

Relative Returns

We wanted to see how different mutual funds compared to the CNX MIDCAP index. We took the annual returns of a dozen funds and subtracted the annual returns of the CNX MIDCAP index. This gives us an idea of how well the fund was managed.

The above result is a bit surprising. Other than the ICICI Prudential Value Discovery Fund, no other fund consistently beat the CNX MIDCAP index. Of course, returns are only half the story, these numbers don’t tell us the risks that were taken to achieve them.

Besides, none of the top funds in a year hold that position over the next (see this.)

Categories Investing Insight, Your Money Tags mutual funds, returns

Ten years is a long time

shyam July 15, 2015

Yearly Nifty and Defty Returns

When you look at the last 24 years of returns, the NIFTY gave negative returns for 8 years – 1/3rd of the time.

Holding period matters

The most frequent advice given to new equity investors is that they should at least have a 3-year horizon. The problem with this is that there have been 7 periods where cumulative 3-year returns have been negative or single digits. This sort of advice does nothing to mentally prepare the investor to stay disciplined.

In fact, dollar investors (NRIs, etc.) have had it rougher.

It is only when you look at 7-years and beyond that you start seeing the kind of returns that begin to make sense.

Long-term portfolio but short-term horizon

Very often, advisors set up portfolios looking at this:

Whereas the media is feeding the investor this:

Long-term investing works if you have the discipline to ignore portfolio returns over very long time horizons. But how many of us have the discipline to stay the course over decades?

Categories Investing Insight, Your Money Tags investing, NIFTY

Changes in Contract Size of Equity Derivatives

shyam July 14, 2015

What happened

SEBI, in its infinite wisdom, concluded that retail investors are speculating too much with derivatives because exposures are too low. So they decided to increase the minimum exposure to Rs. 5 lakh per contract. You can read their press release in the appendix below.

Who is affected?

Anybody who trades naked derivatives will see their margin requirements go up. As you can see from the chart above, most of the exposures are below the new Rs. 5 lakh threshold. Lot-sizes of MRF, BOSCHLTD, EICHERMOT and PAGEIND will come down, but that is of little comfort.

What next?

For exposure margin, you can always buy a bond fund and pledge it with your broker. This way, your margin cash will earn something while it is with your broker.

Second, you can always use option strategies to execute the same view. For example, the total margin requirement to enter a trade in NIFTY futures is around Rs. 17,000/- right now. But when the new regulations kick in, it could go up 3x to 51,000/- Suppose you want to express a bullish view on the NIFTY, instead of buying a naked call or futures contract, you can enter a bull spread to lower the margin requirements.

Here are the numbers from the Zerodha SPAN calculator.

Nifty Futures:
nifty fut margin requirement

Nifty 8500/8600 Call Spread:
nifty call spread margin requirement

The bull spread has lower up-front margin requirements than the naked futures contract, with the added benefit of bounded profit and loss – resulting in lower mark-to-market margin requirements. Traders can use the pledge + spread strategy to bring down their net margin requirements.

Net effect

The net effect of the new regulation could be that naked positions in the futures markets may be replaced by strategies in the options market. The total risk in the system remains constant – like a water balloon, if you squeeze it in one place, it will pop out in another.

We expect retail futures trading volumes to drop and options volumes to pick up once these changes go into effect.

Appendix

Categories Investing Insight, Your Money Tags options