So, you have built a neat long term portfolio over the years. You surely consider yourself lucky, and why not? Your original investment of Rs.20 lakhs in 2004 has gradually grown into a portfolio of Rs.1.40 crore over the last many years. You picked up stocks at the right time and you held on to the quality stocks. Since you have stayed put over the years, your dividend yield is also quite attractive at around 5% of your portfolio value. You really do not have any reasons to complain and you do not intend to liquidate your portfolio any time soon. So, is there something better you can do with your portfolio than letting the shares lie idle in your demat account?
Actually, there are a few interesting ways to unlock the value of your long term equity portfolio..
You can actually borrow against your equity portfolio..
You have surely heard of loan against shares (LAS). Normally, any bank will be happy to fund you against your demat account. Banks and financiers will fund you on the market value of your equity portfolio subject to certain haircut parameters. Normally, the haircut for equities is around 50%. That means on a portfolio of Rs.1.40 crore, you can avail finance to the tune of Rs.70 lakhs. Of course, there will be an interest cost to it but it is a good way of monetizing your equity portfolio without having to sell it. During this period, you continue to be the owner of the shares and the dividends and any other corporate actions will continue to accrue to you. So instead of taking a personal loan at a much higher cost, you are borrowing against your own portfolio at a relatively lower cost. This is one of the most common methods of monetizing your equity portfolio and most online brokers offer you the facility to even borrow online without any documentation up to a certain limit.
You can create arbitrage positions against your portfolio holdings..
Let us say that your portfolio consists of stocks that are also available in the futures & options segment. If the futures are quoting at a 1% premium to the spot price, then it is tantamount to locking in 1% returns on your stock. Each month, you keep rolling over your short position in futures while your equity portfolio remains constant. Normally, short futures roll over at a premium and so you effectively end up earning around 1% each month. More importantly, you are immune to price risk. The spot-futures price gap is your assured profit irrespective of whether the price of the stock goes up or down.
There is also another way of doing reverse arbitrage. That is possible on rare occasions when the futures are quoting at a discount to the spot price. In that case you actually replace your equity position with a futures position. You not only get the same price movement benefits but since you are only paying the margin, you are freeing up funds for alternate use. But this is a risky proposition and also has negative tax implications. You must do this only after consulting your advisor.
You can sell higher call options to reduce your cost of holding the stock..
Let us say that you bought SBI at Rs.340 but the stock fell to Rs.310. Your view is that the stock will stay in the range of 300-320 for the next 6 months. Let us also assume that at the beginning of each month you are able to sell the SBI 330 call option at around Rs.4 premium. If you continue to do that over the next 6 months, then you earn Rs.24 just by taking away the premiums since the options will expire worthless. Looking at it differently, you have reduced your cost of holding SBI from Rs.340 to Rs.316 (340-24) in the last 6 months.
What are the risks in the above proposition? If the stock of SBI goes down further, you need not worry as the equity is for long term holding and you can continue to earn on SBI calls by reducing your strike price consistently. If SBI goes up sharply due to some positive announcement, then you are hedged as you have an equity holding. So any loss on the short call option will be compensated by profit on the equity holding.
Finally, you can also participate in stock lending..
Stock lending is an organized mechanism in the stock exchanges wherein traders can lend and borrow stocks for a fee. Typically, those of you who are holding shares in your portfolio can lend shares. People borrow shares for a variety of reasons. It could be a short trade in the market or to make up for short delivery. The good news is that the entire stock lending and borrowing mechanism operates under the aegis of the stock exchange and is regulated by the exchanges and SEBI. So your shares are absolutely safe. This stock lending mechanism is yet to take off in a big way in India but it is already a multi-billion dollar business in other countries. If you have an equity portfolio, this surely something you need to consider!