No downside Strategy

Note: This was a Premium post and we’ve made it free! Please do check out the Capitalmind Premium subscription – this and much more is available to you regularly!

The momentum portfolio is up nearly 18% on our cash flow. Remember, we invested about 1.5L, equally in four tranches, from November to February. This is now showing a profit of more than Rs. 105,000.

Portfolio Value

Everything’s flying. Nearly all stocks. We only have one stock in that entire portfolio (click here) that is negative from the start – and we have seven stocks making over 30% each.

This is insane. No one knows where it will stop. But obviously, this is not because we are excellent stock pickers. We might be, but at this time, even non-excellent stock pickers are making ridiculous returns, and you have no way to tell the difference.

So let’s assume that this is a mad time, and that the party will end in bloodshed at some point. How can we feel better?

No-Downside and Full Upside

Let’s say that from here, there is a big downside risk. We don’t want any of the pain. I mean zero pain.

You can sell everything. That way, no downside pain.

But there is also a risk of not participating on the upside. Who in their right minds wants to not make money? Losing the upside is also a big fear. Greed and Fear, both are important emotions.

The best point would be to get the upside without losing any of the downside. There is a way to do this.

The No-Downside Strategy

We will track this separately – so don’t actually do this before reading it through.

First, we sell everything. That gives us about Rs. 698,000. This already contains a lot of our profit.

There is an option: The 9,500 call option for December. This trades at Rs.425 today. For a lot of 75 Nifty, you will pay Rs. 31,875 today.

The remaining money (Rs. 666,125) , you can put into a ultra-short-term fund which might yield between 8% and 9% a year. For nine more months (till December) we will get around 6.25% – or a fixed income return of Rs. 44,963.

That means in December you will have Rs. 666,125 + 44,963 = Rs. 711,088.

That’s 7.11 lakh.

In addition, if the market goes up beyond 9500, your call gives you the return on whatever excess gain there is. Here’s how your portfolio will be at various points of the Nifty.

No downside Strategy

On the downside, Your portfolio outperforms. It has no downside at all. No matter how much the Nifty falls,

On the upside, no matter how much higher the Nifty goes, your portfolio will only be Rs. 1,412 short of the Nifty.

This is obviously awesome. For Rs. 1,412 lower profit on the upside, I get no downside at all!

The Real Pain: Taxes

Many of you might say look, we will be taxed. Remember though that this is a momentum strategy. It will involve short term capital gains taxes anyhow as we delete and add more stocks.

If you use a bond-fund, there also you have short term capital gains. This is however charged at a higher rate (your tax slab).

In both the above cases, you can offset such gains through the use of legal tax measures, like Bonus Stripping, Loss Harvesting and tax-free bond interest stripping. See our video webinar for an explanation.

If you aren’t keen on such tax-saving measures, there’s still help. You can offset some tax impact also by using higher yielding instruments. There’s a bond: L&T INFRA N2 (link) which has a buyback in December. It yields about 8.2% till December, at Rs. 1560 today. (It will be bought back, if tendered, at Rs. 1687 in December). Even if you paid some tax on that, the higher yield will result in a better post-tax return.

Do We Recommend This?

Not for everyone. This market is now in high risk territory. We at Capitalmind like high risk territories. The markets can get irrational even longer, and you never know what new justification we will get that will propel us further. Our momentum strategy has done amazingly well, and if irrationality continues, it will continue to do well. We’ll flip after the market turns – meaning, we will likely lose money when it does. (But if the market first goes up 20% and then falls 10%, we are still better off from today)

But many of you are feeling jittery. This is not sane as a market. You are afraid of the downside. You wouldn’t mind the upside, and don’t want to regret it if the market hits 10,000 or such.

Such a strategy makes a lot of sense to relieve stress. Selling the momentum strategy and buying into this No-Downside-Strategy makes a lot of sense.

Also, many of you might think: Look Rs. 6 lakh has grown to Rs. 7 lakh! Why not put more money in? Instead of buying another tranche of the Momentum Strategy, you can do the second tranche in this way: Buy 9500 December Call + Put remaining money into fixed income.

We’ll track both measures going forward. The momentum strategy is as-is, but this becomes a No-Downside Strategy. We’ll do interesting things to get ourselves a better yield on the “fixed income” part. We start with:

  • Rs. 698,000 base capital.
  • Minus Rs. 31,875 for the call (premium: Rs. 425 per nifty, and 75 quantity)
  • We’ll buy shares of HCL Tech (220 shares x Rs. 852 = 187,440) for the buyback.
  • The remaining amount (Rs. 478685) goes into an ultra-short-term fund – Franklin ultra-short-term bond fund is our choice.

We’ll change prices to relevant ones (NAV or price of tomorrow) and mention further changes in #actionable on Slack. It will be fun to see how this evolves!

Here’s the link to the strategy calculations in a Google spreadsheet.

End-Note: Why Is This Even Possible?

It’s a combination of low Implied Volatilities (the VIX is at an all-time low) and reasonably high interest rates available in the market. While nothing is risk free, this one seems to be as close to no-downside-full-upside as we can get.

Our Premium Long Term Portfolio is at

Our Premium Momentum Portfolio 2.0 is

Our Premium DivYield Portfolio is at

Note: This is not portfolio advice. Consider this a very risky portfolio and proceed at your own risk. At CapitalMind Premium the reason we have a portfolio is to demonstrate our commitment to our analysis, and we track it closely. It is not meant to be a recommendation for anyone in particular, primarily because we don’t know your risk profile.

Holdings: Analyst and family do own some of the positions listed above. Please assume we are biased.


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