Clients that have enrolled with Minance's APC can earn additional returns on top of what their existing investments make.
A product offered by Bengaluru-based wealth management startup Minance allows investors to earn additional returns over and above their regular investments such as mutual funds, equity, debt or fixed deposits.
The offering, called Assets Pay Cash, works like this: investors who have one or more of the above investments can collateralise them with Minance’s funding partner, which will release margin to the extent of 85 percent of the investment’s value.
Minance then uses the amount made available by the funding partner to trade options strategies on behalf of the client with an aim to generate consistent returns.
As a result, clients that have enrolled with APC can earn additional returns on top of what their MF investments make.
What’s the catch?
Leveraging one’s investments to earn higher returns is not an idea that is new, as many investors collateralise their investments to raise additional capital.
However, Minance claims to be the first company to formally offer this as a standardised, professionally-managed product.
Such a strategy is not without risks. So, how does Minance manage them?
"We run an ultra-conservative derivative strategy,” says Anurag Bhatia, CEO of Minance. “We write Nifty options 3 to 4.5 standard deviations away from the current price.”
What this means is that the company writes far out-of-money options, collecting small premium on each trade.
An option writer is obligated to sell or buy a particular stock or index at a pre-agreed price (called strike price) in exchange for a premium.
Traders that write options with the strike price being far from the current market price hope to keep earning small premiums while facing a low likelihood of their options actually being exercised. But the strategy can prove to be risky during times of heightened volatility.
The broad market direction after considering fundamental and technical factors is also taken into account, Bhatia says.
For instance, if the Nifty breaks a crucial resistance (say, 12,100) and is expected to trend higher, the strategy would call for writing put options at around 11,500.
If volatility is expected to rise, the strike prices will be moved further away from the market price.
The strategy appears to have worked well so far. According to Minance, APC has not made losses in any month since its inception in September 2017, earning investors anywhere between 0.8-1 percent every month.
It must be noted that the Nifty has been fairly stable over the past few years, barring some sharp volatility in September-October 2018.
Still, Minance expects its strategy to be able to take volatility in its stride. Backtests of its strategy show that, in theory, it would have earned about 6.75 percent even in 2008 – when there was a global meltdown. Back-tests, however, are not a sureshot indicator of future performance.
Investors that have debt/mutual fund/equity/FD investments worth Rs 3 lakh or more can invest with Minance. The investments are held in demat form in the client’s own account, which is subsequently used for collateralisation.
Profits from the trades are ploughed back into the portfolio with an option to pay them out every quarter. A 10 percent performance fee applies on the profits.
Losses, if any, will be adjusted from the portfolio amount. Investors must note that a large loss in the strategy can result in Minance having to resort to sell the MF units to make good the loss and bring the portfolio up to the level of capital required. Conversely, a loss in the underlying portfolio on which the money has been raised could also result in liquidation of the investment portfolio.
Who is APC fit for?
Even as Minance claims to run a conservative strategy, and APC’s stable performance so far attests to this, the product may not be for everyone.
As derivatives are an inherently risky proposition, investors should consider investing in APC only if they have an adequate risk appetite, says a financial planner Moneycontrol spoke to.“The portion of funds that has been earmarked for this should not be treated as a risk-free investment,” he adds.