Though large caps don’t give high returns but there are quality large caps which assures steady growth for long term.
Currently the method I use is to buy futures contract for it for 3 months and then sell it irrespective of what price it is at and replace it with another futures contract for next three months, so mentally I am holding it for long term. This way I keep replacing every 3 month.
What other ways can a value investors use to leverage for long term ?
I read somewhere there is a way to purchase leveraged ETF for long term, Is it possible in India ?
Nice strategy,
What method do you follow to choose the contracts? and the weighing scheme?
BTW, I personally your method is far more efficient than leveraged ETFs. The only problem is the rollover cost as 3 month futures aren’t necessarily the most liquid. Might actually be better to use monthly contracts. Other than the liquidity there is the advantage of having a specific rollover product per script which helps you minimise impact cost. Another drawback for most small investors is that these days each lot is a minimum of Rs. 4-5 lakhs so minimum exposure that one can take is actually a bit steep.
Cheers
Sachit
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One disadvantage with leveraging with Futures is profit from F&O is treated as business income and taxed at 33%. With long term capital gains at 0%, lot of profit in Futures is taken by tax man.
Another disadvantage is rollover costs. Also how much margin you keep aside for the future position decides the risk/reward. Or one day loss of 10+% can wipe you out.
I have not calculated the costs/tax etc. but feel that leveraging with loan and buying in cash/delivery is better option. If we manage to get personal loan or any other loan at 14% and invest in stocks like HDFC Bank to make 20%, it’ll add up in long term. Also we can hold position when stock falls drastically and pay off loan with salary/business income. In 2008 like fall, futures position will wipe out the portfolio if used excessively.
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“Stop loss” is the key word in trading
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We are not trading, we are investing, here we are trying to buy and hold and also finds tricks to use leverage as well.
@nikrod12 : Precisely. you have to calculate the amount of leverage is compensating for the tax and rollover cost. Most importantly it has a huge risk of wiping out your entire account incase it fall below your expected worst case drawdown.
I think LAS is a better idea but one must be v careful in stock selection - key is to select a stock which grows at an “assured” 18% instead of a stock which “could” grow 30%.
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Personally i find the option of taking a personal loan and investing in shares more practical. The repayment of the loan should not be dependent on the performance of the stocks bought from the loan. It should be comfortable service-able from other sources of income such salary. Therefore i would not have preferred loan against shares where the movement of share prices may bring in margin requirements.
I also think having an overdraft is a good way to leverage.here, only the interest is to be serviced. Since it is not a loan, principal repayment does not arise. even better - In case one has FDs he can keep it as security to take overdraft so that interest is lower. FDs remain as FD. Only interest difference between what you earn on the FD and what the overdraft carries needs to be paid. The overdraft can be partly or fully liquidated as and when one gets surplus funds. Or if required, from the FDs.
In gulf region where i am based interest rates are relatively low. I prefer to take a loan on my credit card for 6 months where i have to pay totally 2-3% extra over the loan amount in the form of charges/ intrest. My rationale is that over 6 months, if my investment is able to grow by 2-3% then i have broken even. I repay the loan in 6 months and am ready to take another if i feel the time is right. However i ensure that my leverage does not exceed 20% of my total PF value since that is my comfort threshold.
One drawback of taking a loan and front-ending the investment is that if your stocks fall during the loan tenor then you may not have as much surplus to invest because part of your income would already have been earmarked towards paying the principal. Here my 20% threshold helps because i retain some surplus saving every month from my salary to invest if stocks fall. In a total crash i would not be averse to pushing up my leverage to take advantage of the fall.
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Why shy away from calling a spade, a spade?
I have been doing futures trading based on fundamentals with moderate success so far and I cannot stress enough how important is a stop loss even when your style is similar to investing.
Be it investing or trading, capital protection should always be a priority.
i lost about 30 lacs thro’ futures trading and it took me over 2 - 3 years to break even and recover from that loss - I used to think that had i not known and not started futures trading ( like i started smoking from my college days ) I would have been a better man ! We have so many things working against us in futures trading - about 1% extra every month if you are carrying over a long position , opportunity lost on margin to be maintained,enormous ENORMOUS stress which used to impact my sleep and my health - and finally what ? nothing much . It was a stroke of luck which helped me finally make profits on my futures position and get out . Never again will i want to trade in futures.Lesson learnt.
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@reacher Great thoughts. People don’t look at aspects like stress when they talk about returns.
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Like a job, one should compare earnings per hour. If you are trading in derivatives or significantly leveraged, you may be spending ten times the time on screen.
Even if your total earnings are up by 30% or even more, your earnings per hour of work or screen time is significantly lower.
In developed countries, even regular jobs are compared on per hour money and not total money.
Cheers
What about buying the future contract and selling the call ?? . This way you can reduce the costing but here upside is limited but downside is unlimited.
I use a LAS account and pledge stable companies’ shares. I keep loan amount to about 10% of the portfolio. This is as suggested by Basant Maheshwari. He says that this way the interest can be serviced by dividends.
Also, i keep a cushion in my LAS account limit. So if my limit is rs 5, I use only rs4
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@reacher I can understand what you went through, even I learnt my lessons the hard way , so I never invest more than 10% of my asset in F&O on a sunny day. Just to answer you which may not be in context with the question’s title , I will brief my investment strategy.
I follow 10:70:20 as my ratio of F&O,Stocks,Fixed Returns:
Now say a recession like 2008 hits, my portfolio would look like this:
============== F&O === Stocks === FD
Before Recession : 10 ===== 70 ===== 20
At peak Recession: -40 ==== 35 ===== 20
So to safeguard F&O a/c you liquidate Stocks and FD move 20 lakh each to F&O:
F&O: (10-50+40)=0, Stocks: (70-35-20)=15, FD:(20-20)=0
1 Crore becomes 15 Lakh. How scary does it look? Trust me even the best lot would struggle to hold on to their nerves.
Now after market comes back to breakeven like in 2010:
F&O: (10-50+50+40+400)=450, Stocks: (15+15)=30, FD : 0
Now how does it look in 2010. Market Just came back to where it was in 2007, you have simply grown your asset 4.8x when others were getting their account wiped out in the midst of recession.
However I still don’t consider the above ratios very safe. What if it’s a bigger depression than 2008? It’s believed the next depression is going to be bigger than 2008. Besides our assumption of a valuepickr’s stocks’ portfolio to have the same beta as the index is too optimistic to be true. Moreover emotionally it’s not as simple to execute as on papers. If someone is still not scared show him this http://www.macrotrends.net/1319/dow-jones-100-year-historical-chart:
2008 => -50%(It took 2 years to break even)
1932 => -88%(It took 25 years to break even)
out of curiosity, how much difference does it make to returns vis a vis additional risk? Say on portfolio of Rs 100, additional Rs 10 comes in this way and 8 goes into market. That means pf becomes Rs 108 - dividend income + Added risk + Rs 2 cash.
If at all you have to do this (and I don’t recommend doing it) I think you’re better off taking a very long term loan and putting that in leveraged stocks. The loan collateral should be negatively correlated with equities, ideally. At the very least should have no correlation. Two assets come to my mind: gold and real estate. So I’d say the ‘safer’ option is to take a loan against gold or reverse mortgage your house and ‘play’ using that money.
Disc: I’m personally very much against this, but find this an intellectually stimulating exercise.
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Totally depends on which stocks at what price you buy. For a salaried person, who is already fully invested, it is a good thing where u can temporary increase leverage in situations like this week and then being it down over time.
Hi
Sorry for bumping an old thread, but the above reply seems most pertinent to a scenario I am struggling with.
A home loan transfer situation has arisen where I can leverage.
Bajaj Finance has this loan cum overdraft facility. In my scenario, math turn out such my current emi is good enough to pay for their home loan plus 1.5x that amount. So essentially my cash flow is unchanged. While I suddenly have a line of credit worth - well, I can leverage more than 1.5x, but then my cash flow changes. Current interest rate is 6.6.
1.5x line of credit amounts to doubling my current investible capital. Given current market and a 4-5 year horizon, we should be able do much better than 6.6 pc.
Standard home loans from others, offer the same rate on the loan, but no overdraft. A topup loan has higher interest rates (+5-8 basis points) and restrictions on use. No stocks, for instance.
Is this, and the institution a good deal? Is this good leverage or bad?
Opinions would be much appreciated.
Edit - Baj Fin tenure is 15 yrs. On total used amount at 6.6 pa for 15 yrs. Floating.
regards.
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Bajaj Fin gives a working capital loan against property at 6.6%. This money too cannot be put anywhere else but in the Business.