The rise of the machines - 2

Couldn't resist sharing this in the context of my earlier post on The rise of machines ....

Eight decades ago, a great man, one of the greatest the world has ever seen - Charlie Chaplin, made a film on the developments of those days. Enjoy this short clip from the 1936 film, Modern Times.

While watching this clip, replace the eating machine with a Robo advisors in your mind.

Have fun.

VMA event of 19th Feb covered in Hitvada on 25-Feb-17

Thank you Ranjit Dani

Chat transcript - build wealth through mutual funds - master your money

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Moneycontrol - Master Your Money chat transcript

The rise of the machines ...

An IFA can handle the client’s emotions, hold hands and give assurances or remind them about the inherent risks. Click on the link here  to read further

SIP Top Up - a very good facility for the salaried class

My article in Gujarati Mid-day today on SIP Top-up facility

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The English translation is as under:

Earlier, we have discussed about the benefits of SIP and also seen how it works. We highlighted the two major principles on which the concept of SIP works, viz., “Rupee cost averaging” and “power of compounding”. The power of compounding helps one accumulate large sum of money through small regular contributions. We know that small drops make an ocean. It is the same with SIP, too.

An investment of Rs. 5,000 per month for a period of 25 years adds up to more than Rs. 65.00 lacs, if the investment grows at 10% p.a. yes, every drop makes an ocean.

Well, there is practical difference here. Of course, we do not know the exact return that any scheme would be able to generate in future, there is a small difference between an illustration as above and real life. In real life, most of the time, the ability to save also increases. How do we factor for that?

That is where mutual fund companies came up with a practical and a very useful innovation known as SIP top ups. In this case, the monthly SIP amount is increased periodically. Let us assume for the purpose of simplicity that the amount is increased every year at the rate of 5%.

Thant means, in our example above, while the investor started with monthly investment of Rs. 5,000; the same was increased to Rs. 5,250 per month in the next year (Rs. 5,000 plus 5% growth on that). In such a case, the accumulation would definitely be higher, since the invested amount keeps increasing.

The calculations suggest that the amount accumulated would be more than Rs. 1.50 cr. Compare this to Rs. 65 lacs accumulated if the invested amount was not increased.

There are schemes available that allow an investor to increase the amount by a certain percentage (as shown above) or by a certain amount, say Rs. 500 per year. There are schemes that allow an investor to top up the SIP amount every six months, too.

If you expect your income to grow year after year, it is logical that the savings would also grow. In such a case, SIP top up is an ideal choice for most people earning regular income.

- Amit Trivedi

 

Transcript of today's chat on www.moneycontrol.com

Equity investments simplified

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Arbitrage funds - for short term parking of funds

Please click on the link here to read the article, published in Mid-day Gujarati, Mumbai edition on 6th February, 2017

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The English translation is as under:

In the last few years, one of the mutual fund categories has become quite popular – especially among individual investors intending to park money for short periods of time. This category is known as “arbitrage funds”.

As such, the name does not indicate anything, especially for the uninitiated investors or someone who is less familiar. However, these funds are among the safer funds in that they do behave almost like liquid funds. As mentioned earlier, these funds may be considered for parking money for short periods like a month or a quarter or so.

Let us understand how these funds work.

The term arbitrage means “simultaneous buying and selling of same securities, commodities, or foreign exchange in different markets to profit from unequal prices.” Arbitrage requires two separate markets and a price difference in these markets for the same security. Since one is simultaneously buying the cheaper one and selling the costlier one, this is a profit-making opportunity without involving any risk.

In reality, there could be transaction costs involved in both buying as well as selling. These costs need to be adjusted before arriving at the profit number. Such anomalies do exist at times and many players take advantage of the same.

Lest us elaborate on this in the Indian context through the example of arbitrage opportunities in stock markets.

On 3^rd February, Axis Bank stock closed at Rs. 489.90 on the National Stock Exchange and at Rs. 489.65 on the Bombay Stock Exchange (both prices are taken from the cash market segment). If someone could buy on BSE and sell on NSE simultaneously at the closing price, there was a net profit of Rs. 0.25 per share, assuming the transaction costs to be zero. (For the purpose of this discussion and example, we would assume the transaction costs to be zero. For simplicity, we are also assuming that one has to deliver the shares at the NSE only after receiving the same from the BSE.)

Since both purchase and sale happened simultaneously, there is no risk involved – whatever happens to the price of the stock. The profit of Rs. 0.25 per share on a share price of Rs. 489.65 translates into a profit of 0.051% for a day, or 18.64% per year. Please understand that this calculation is based on the assumption that the transaction costs are zero. Once you adjust for the costs, there is no profit opportunity left.

On the other hand, there is generally a price difference between the cash market and the derivatives market. Taking the example of Axis Bank once again, on the BSE cash market segment, the closing price was Rs. 489.65 and that for Axis Bank futures (expiring on 23^rd February) was Rs. 491.30. This meant that the futures price is higher than the cash market price by Rs. 1.65 per share. Someone can profit from this opportunity (once again, this calculation is without factoring the transaction costs) by buying the shares in the cash market segment and selling the futures. The futures contract would automatically expire on 23^rd February, whereas the shares bought on cash market must be sold on the same day. That means, the investor would be investing Rs. 489.65 per share for 20 days and earn a profit of Rs. 1.65 for the same. This translates into an annual profit of 6.15%.

If during the 20 day period, share prices go up, one would profit on the cash market – the shares bought, whereas lose on the futures market – futures contracts sole. If the prices go down, it would be reverse, i.e. loss in the cash market segment and profit in the futures market. Thus, theoretically, one has pocketed the annualized profit of 6.15%, irrespective to what happens to the price thereafter. This is why such trade is considered risk-free.

Arbitrage funds take the advantage of such opportunities.

At the same time, as we have seen in the numbers, most of the time, the profit is in the range of the returns liquid funds can generate.

Since these funds invest in the stock market, such funds may get classified as equity funds for the purpose of income tax. That makes these funds very attractive as compared to liquid funds.

- Amit Trivedi