How to unlock the value of your equity portfolio?

The moral of the story is that you don’t need to worry about distress selling your portfolio. There are a number of other ways to monetize your portfolio; without selling blue chips.

May 29, 2020 09:05 IST India Infoline News Service

The sharp correction in the Nifty from around the 12,000 levels in Jan-20 would have certainly caused considerable damage to equity portfolios. However, if you have been holding the stock for a long period, you are most likely to be still sitting on pretty profits, despite the correction. To illustrate this point, let us look at the price chart of Bajaj Finance.

Bajaj Finance Price Chart 2016 to 2020
Chart Source: Google Finance

For example, the stock price of Bajaj Finance appreciated nearly 10-fold between 2016 and 2020. However, even after the 60% correction from the peak over the last 3 months, the stock price of Bajaj Finance has still given 350% returns since 2016. For an investor who is convinced about the long term prospects of the stock, there is no incentive to exit the stock after it has fallen 60%. The good news is that there are other ways to monetize your holdings, without selling it from your portfolio. Here is how.

Take loan against shares (LAS) on the value of your holdings

Today, most banks and NBFCs will be more than happy to lend to you against shares held in your demat account. The process is very simple, although it is normally restricted to the top 200 stocks only. LAS normally entails a haircut of 50%. That means; if your portfolio value at current prices is Rs1.50cr, you can get LAS funding up to Rs75lakhs. The LAS only requires that you create a lien on your demat holdings. Once you repay the loan, the lien is removed. Even when the shares are pledged to the lender, you continue to receive the dividends and other corporate actions. The LAS can be structured as an overdraft facility against which you can draw. The advantage in the overdraft facility is that you only pay interest on the loan limit utilized even when the sanctioned limit is larger.

You can do cash-futures arbitrage against F&O eligible stocks

If the stocks in your portfolio are permitted in futures and options, this is a unique opportunity to monetize your holdings. In arbitrage you buy in cash market and sell the same quantity in futures. You can only do that in multiples of the respective F&O lot sizes (e.g. Bajaj Finance has a lot size of 250 shares). Since you already hold these shares in your portfolio, you can sell equivalent futures and create an arbitrage. How does this put your idle stocks to use? If the 1-month futures are quoting at a 1% premium to the spot price, it is tantamount to locking in 1% assured return on your stock for the month. You are long on the stock and short on futures. Each month, just keep rolling over the futures to the next month and keep earning the spread. There is no risk, because you are perfectly hedged.

Unlock value by selling covered calls on the stock

A covered call is an F&O strategy normally applied when a stock you have purchased has corrected sharply but you still have conviction. In a covered call, you sell higher strike calls against your holdings. For example, you are holding Bajaj Finance and expect that the stock will be range bound between Rs1800 and Rs2200 for next 6 months. You can sell Jun 2200 call options on Bajaj Finance at the price of Rs38. Each month at the beginning of the contract, you can sell the Bajaj Finance 2200 call for a premium of say Rs35-40. Over 6 months, you earn Rs240, which is roughly 10.91% return in 6 months.

Are there any risks in the covered call strategy? If the stock falls vertically, then you have a problem because you are holding the stock. Hence, this strategy can only be applied on stocks where you have fundamental conviction. What if Bajaj Finance moves up sharply? You are protected as you have equity holdings. Any loss on the short call option will be compensated by profit on the equity holding. Ideally, covered calls work best when you are moderately bullish on a stock you are holding.

Stock lending will pick up sooner rather than later

Stock lending is an organized mechanism permitted by the stock exchanges and regulated by SEBI wherein traders can lend and borrow stocks for a fee. Since you are holding shares in your portfolio you can lend shares for a fee. Your shares are absolutely safe. Market players look to borrow stocks either to avoid auctions or to borrow and short the stock when they are extremely bearish. Stock lending is yet to take off in a big way in India but it is a multi-billion dollar business globally.

The moral of the story is that you don’t need to worry about distress selling your portfolio. There are a number of other ways to monetize your portfolio; without selling blue chips.

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