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5 mins read . 20 Dec 2022
If you are holding an equity stock portfolio of Rs50 lakhs, what other benefits can you derive from the equity portfolio, other than dividends and capital appreciation? You may be a buy-and-hold investor, but you must know that there are ways to monetize your equity portfolio, without selling stocks. Now that sounds interesting. You must have been imagining all along that the only way to monetize your equity portfolio is to sell stocks, but that is not the case.
Today, getting a loan against your shares is quite simple if you have a quality portfolio of mostly blue chip stocks. Any bank will be willing to fund you against your demat shares and in most cases, the broker has the tie-up with the NBFC or bank to make it a seamless process. The LAS is restricted generally to the NSE 200 stocks and the haircut is around 50%. That means; if your portfolio value is Rs50 lakhs in NSE 200 stocks, then banks will fund you for up to Rs25 lakhs. The requirements is that you pledge these shares with the lender via demat pledge. In terms of cost of funds, being secured loan, the cost is much lower than an unsecured personal loan.
Arbitrage is the strategy of buying in the cash market and selling an equal number of shares in the futures market. This can only be down on stocks where stock futures trading is permitted. Normally, futures trade at a premium but on expiry day, the cash and futures expire at the same price. Hence, the arbitrage spread becomes your assured return. Normally arbitrage returns vary around the interest rates. On an average, you can earn about 6% to 8% annually on arbitrage net of brokerage and other costs. The advantage of using arbitrage when you are holding stocks is that you just need to sell higher futures and keep rolling them over each month. Rollover normally happens at a positive spread, which is what you earn on arbitrage. Not bad for an idle portfolio.
Let us say you are a long-term investor holding State Bank of India in your portfolio. Also, being a fundamentally sound stock, it has limited downside risk. You are all set for doing covered calls. Hold SBI in your equity portfolio and keep selling higher call options on SBI. If the price goes up rapidly, you are protected as you have equity holdings. Each month, the covered call premium is your earnings on the idle portfolio. This can only be done on stocks that are in F&O but not speculative.
Stock lending is yet to pick up in a big way due to regulatory hassles, but globally this is big business. Under stock lending, you can lend your stock holdings to short sellers for interest. The entire stock lending happens through the NSE platform so it is totally secured. Stock lending is an organized mechanism in the stock exchanges wherein traders can lend and borrow stocks for a fee. It is expected to be big in India too.
By unlocking portfolio value we mean earning an income out of your equity holdings, without having to sell it. All these are absolutely workable methods.