bhavesh sip report

8/18/2019 Bhavesh SIP report

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Summer Project Report on

‘’Research on Investment behaviour of High NetWorth Individuals and

risk hedging by Options Strategies’’

Conducted at

Arya Fin Trade Services (India) Pvt. Ltd

Project Guide:

Mr.Bhavesh Patel

Asst. Vice PresidentArya Fin Trade Services (India) Pvt.Ltd.

Submitted By:

Bhavesh L Tavethiya

Batch: 2014-16

Roll No.74

In partial fulfillment of the requirement of Summer Internship Programme

In

Masters of Business Administration (M.B.A.)

Submitted To:

M.S. PATEL INSTITUTE OF MANAGEMENT STUDIES

FACULTY OF MANAGEMENT STUDIES

THE MAHARAJA SAYAJIRAO UNIVERSITY OF BARODA,

VADODARA 390002


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DECLARATION

I, Bhavesh L Tavethiya hereby declare that this report is prepared on the basis of

research project done by me, as a part of my Summer Internship Programme, at Arya Fin Trade

Services(India) Ltd.' for the period from 15th May,2015 to 15th July, 2015 (8 weeks).

I ensure about the authentication of the content, and facts used in the report. I assure

that the data taken will be used only for academic purposes and will not be used for

commercial or any other purpose. Suggestions mentioned in the report are as per my opinion,

which are based on my findings, and are correct to the best of my knowledge.

(Bhavesh L Tavethiya)

Date:

Place: Vadodara


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ACKNOWLEDGEMENTS

It gives pleasure to present this project report, which is an outcome of the study “Analysis of

High NetWorth Individuals and risk hedging by Options Strategy” Completing a task is never

one-man effort. It is often the result of valuable contribution of a number of individuals in a

direct or indirect manner that helps on shaping and achieving an objective.

I wish to express my sincere gratitude to number of people who have been associated with me

throughout this project. I feel blessed to have the opportunity of expressing my heartly

gratitude to Mr.Bhavesh Patel (Asst. Vice President, Arya Fin Trade Services India Pvt. Ltd.)

who gave me an opportunity to carry out this project and without help of him my project could

not have been hatched.

I also thankful to the other staff member of Arya Fin Trade for their continuous motivation

throughout this program, which really helped me in completing this project.

Lastly I would like to extend my sincere thanks to Prof. (Dr.) Jayrajsinh Jadeja(Dean, Faculty of

Management Studies, The M.S. University of Baroda), Ms. Smita Trivedi ( Asst. Prof., Faculty of

Management Studies, The M.S. University of Baroda ), Prof.(Dr.)Surendra Sundararajan(Prof.,

Faculty of Management Studies, The M.S. University of Baroda )and to the entire institute, for

availing me of the opportunity to work in such an excellent organization.

This project would not have been possible without the cooperation & response of the

respondents, I am grateful for their time & feedback to the questionnaire.


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EXECUTIVE SUMMARY

Today Indian stock market is the booming and number of High Net Worth Individuals

also rising. There is notable growth of high etworth individuals in India as the data shows in the

report. So it is good step to target high networth individuals. These projects focus on the High

networth individuals in India and influence them to invest in stock market trading by showing

the advantages of options trading.

Sometimes people have affluent amount to invest in various investment options but

lack of awareness of the right investment option and guidance of any wealth management

services they are enable to invest. Arya Fin Group currently focus on the HNI clients and many

new clients are ready to invest their wealth in stock market but fear of loss of their portfolio

suddenly during stock market crash they slightly hesitate to invest. So my report shows some

facts and evidence to shows the advantages of options trading.

One examples in report show how I have managed portfolio of these clients by using

options trading. Then in next part research was carried out to know the behavior of HNI clients

towards the options trading. On the basis of my survey analysis I give suggestion which will be

very helpful to attract new HNI clients.


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TABLE OF CONTENTS

Sr. No. Title Page No.

1 Introduction 8

2 Company Profile 12

3 Literature Review 15

4 Introduction: HNI& Derivative Market 16

5 Options Strategies 23

6 Investment options for HNI 38

7 History of stock market crash 42

8 Research Methodology 47

9 Data Analysis & Interpretation 50

10 Findings 67

11 Suggestions 68

12 Conclusion 69

13 Bibliography &Webliography 73

14 Annexure 88


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Charts and Tables

Charts and Tables Page No.

1. Infrastructure 13

2. SWOT Analysis of Arya Group 14

3. Growth in Options trading 22

4. Options strategy 23

5. Example of HNI client 44

6. Data Analysis & Interpretation 50


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INDIAN STOCK MARKET

1.1Introduction

Indian Stock Markets is one of the oldest in Asia. Its

history dates back to nearly 200 years ago. The earliest

records of security dealings in India are meager and

obscure. The East India Company was the dominant

institution in those days and business in its loan

securities used to be transacted towards the close of the

eighteenth century.

By 1830's business on corporate stocks and shares in Bank and Cotton presses took place

in Bombay. Though the trading list was broader in 1839, there were only half a dozen

brokers recognized by banks and merchants during 1840 and 1850. The 1850's witnessed a

rapid development of commercial enterprise and brokerage business attracted many men

into the field and by 1860 the number of brokers increased into 60. In 1860-61 the

American Civil War broke out and cotton supply from United States to Europe was

stopped; thus, the 'Share Mania' in India began. The number of brokers increased to about

200 to 250.

At the end of the American Civil War, the brokers who thrived out of Civil War in 1874,

found a place in a street (now appropriately called as Dalal Street) where they would

conveniently assemble and transact business. In 1887, they formally established in

Bombay, the "Native Share and Stock Brokers' Association”, which is alternatively known

as “The Stock Exchange". In 1895, the Stock Exchange acquired a premise in the same

street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was

consolidated.


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The two major stock exchanges in India are:-

National Stock Exchange (NSE)

Bombay Stock Exchange (BSE).

1.2 National Stock Exchange

The National Stock Exchange was incorporated in 1992 by Industrial Development Bank of

India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of

India, all Insurance Corporations, selected commercial banks and others.

The National Stock Exchange (NSE) is India's leading stock exchange covering various cities

and towns across the country. NSE was set up by leading institutions to provide a modern,

fully automated screen-based trading system with national reach. The Exchange has brought

about unparalleled transparency, speed & efficiency, safety and market integrity. It has set up

facilities that serve as a model for the securities industry in terms of systems, practices and

procedures.

Trading at NSE can be classified under two broad categories:

Wholesale debt market

Capital market

Wholesale debt market operations are similar to money market operations - institutions and

corporate bodies enter into high value transactions in financial instruments such as

government securities, treasury bills, public sector unit bonds, commercial paper, certificate

of deposit, etc.

Capital market: A market where Debt or Equity Securities are Traded.

There are two kinds of players in NSE:

Trading members

Participants


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Recognized members of NSE are called trading members who trade on behalf of themselves

and their clients. Participants include trading members and large players like banks who take

direct settlement responsibility.

NSE Nifty

S&P CNX Nifty is a well-diversified 50 stock index accounting for 22 sectors of the economy.

It is used for a variety of purposes such as benchmarking fund portfolios, index based

derivatives and Index funds.

NSE came to be owned and managed by India Index Services and Products Ltd. (IISL), which is a

joint venture between NSE and CRISIL. IISL is India's first specialized company focused upon the

index as a core product. IISL have a consulting and licensing agreement with Standard &

Poor's(S&P), who are world leaders in index services. CNX stands for CRISIL NSE Indices. CNX

ensures common branding of indices, to reflect the identities of both the promoters, i.e. NSE

and CRISIL. Thus, 'C' Stands for CRISIL, 'N' stands for NSE and X stands for Exchange or Index.

The S&P prefix belongs to the US-based Standard & Poor's Financial Information Services.

1.3 Bombay Stock Exchange

The Bombay Stock Exchange is one of the oldest stock exchanges in Asia. It was established

as "The Native Share & Stock Brokers Association" in 1875. It is the first stock exchange in

the country to obtain permanent recognition in 1956 from the Government of India under

the Securities Contracts (Regulation) Act, 1956. The Exchange's pivotal and pre-eminent role

in the development of the Indian capital market is widely recognized and its index, SENSEX , is

tracked worldwide.

SENSEX

The Stock Exchange, Mumbai (BSE) in 1986 came out with a stock index that subsequently

became the barometer of the Indian stock market.

SENSEX is not only scientifically designed but also based on globally accepted construction

and review methodology. First compiled in 1986, SENSEX is a basket of 30 constituent stocks

representing a sample of large, liquid and representative companies. The base year of

http://en.wikipedia.org/wiki/India_Index_Services_and_Productshttp://en.wikipedia.org/wiki/India_Index_Services_and_Productshttp://en.wikipedia.org/wiki/India_Index_Services_and_Productshttp://en.wikipedia.org/wiki/NSEhttp://en.wikipedia.org/wiki/NSEhttp://en.wikipedia.org/wiki/NSEhttp://en.wikipedia.org/wiki/CRISILhttp://en.wikipedia.org/wiki/CRISILhttp://en.wikipedia.org/wiki/Standard_&_Poorhttp://en.wikipedia.org/wiki/Standard_&_Poorhttp://en.wikipedia.org/wiki/S&Phttp://en.wikipedia.org/wiki/S&Phttp://en.wikipedia.org/wiki/Standard_&_Poorhttp://en.wikipedia.org/wiki/Standard_&_Poorhttp://en.wikipedia.org/wiki/CRISILhttp://en.wikipedia.org/wiki/NSEhttp://en.wikipedia.org/wiki/India_Index_Services_and_Products


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SENSEX is 1978-79 and the base value is 100. The index is widely reported in both domestic

and international markets through print as well as electronic media. The SENSEX captured all

these events in the most judicial manner. One can identify the booms and busts of the Indian

stock market through SENSEX. The launch of SENSEX in 1986 was later followed up in January

1989 by introduction of BSE National Index (Base: 1983-84 = 100). It comprised of 100 stocks

listed at five major stock exchanges.

OVERVIEW OF THE REGULATORY FRAMEWORK OF THE CAPITAL MARKET IN INDIA

India has a financial system that is regulated by independent regulators in the sectors of

banking, insurance, capital markets and various service sectors. The Indian Financial system

is regulated by two governing agencies under the Ministry of Finance. They are

1. Reserve Bank of India

The RBI was set up in 1935 and is the central bank of India. It regulates the

financial and banking system. It formulates monetary policies and

prescribes exchange control norms.

2. The Securities Exchange Board of India

The Government of India constituted SEBI on April 12, 1988, as a non-

statutory body to promote orderly and healthy development of the

securities market and to provide investor protection.

Department Economic Affairs

The capital markets division of the Department of Economic Affairs regulates capital markets

and securities transactions.The capital markets division has been entrusted with the responsibility of assisting the

Government in framing suitable policies for the orderly growth and development of the

securities markets with the SEBI, RBI and other agencies. It is also responsible for the

functioning of the Unit Trust of India (UTI) and Securities and Exchange Board of India (SEBI).


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Background:

The Company is promoted and started on 22nd May, 2010 by Mr. Shani Prahladbhai Patel &

Mr. Ravi Prahladbhai Patel with an objective of carrying the Business of Broking & Trading in

Derivative, Shares and Securities Market. The company has successfully completed Four

financial years of its business with continuous expansion of its operations.

Current Operations:

Currently, the management is eying to garner the growing opportunities into the Broking

Business. Considering the recent rebound in the global indices along with the stellar

performance of NIFTY and SENSEX, we expect local markets to regain confidence of retail

investors. The volumes of the stock exchanges are on higher side compared to previous years.

The Management is having strong relationship in the market mainly with High Net-worth

Individuals (HNI) and Large corporate. The company is providing platform for trading in various

financial segment like, Equities, Currency, Commodity (Agri & Non-Agri), Future & Options,

Debt Market, Primary Market, Mutual Fund advisory through following Exchanges

1. National Stock Exchange (NSE)

2. Bombay Stock Exchange (BSE)

3. Multi Commodity Exchange (MCX)

4. National Commodity & Derivatives Exchange (NCDEX)

COMPANY PROFILE

Corporate Office:

1004, Venus Atlantis,

Near Prahalad Nagar Auda Garden,

Anand Nagar, Satellite, Ahmedabad-15

Ph. No: 079-40062207

Fax No: 079-40062209

E-Mail: [email protected]

Registered Office:

Plot No.PTS-93/240/A/1

New City Survey,

Dr.Kelkar Road,

DIU,

Dadar Nagar Haveli-364001

INDIA


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At present, the Average daily volume in Currency and Share market is of Rs. 150 cr with

company aiming to reach 1000 cr mark by 2017. To achieve this target, the management is

concentrating on providing valued added services to High Net-worth Individuals (HNI) and Large

corporate. with the help of State of the art research tools like Bloomberg, Thomson Reuters,

Capital Markets, etc. and using the modern Algo trading platforms to give an edge to its

customers over others. The Company has team of experts in concerned segment to outperformin highly competitive business environment. The Company well equipped with the following

infrastructure facility to meet its future goals.

INFRASTRUCTURE

Sr.

No.

Particulars Operation

1. Office Premises – 6000 Square Feet.

Fully Furnished Office Premises located atPrahladnagar – a Corporate Area declared by AMC.

2. Man Power – 25 Employees Well Experience, trained and knowledge base core

team employees to service to the client.

3. Hardware Infrastructure Approx. 30, Computers which offers multiple

features from varied Auto uploading, processing

reporting & mailing with Digital Signature to Client

level Portfolio Management Analysis ; PledgeManagement ; Brokerage & Remeshire Sharing

Management on multiple basis


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SWOT ANALYSIS OF COMPANY:

SWOT

STRENGTH:

KNOWN FOR TRANSPARENTFUNCTIONING

WELL MAINTAINEDINFRASTRUCTURE

GOOD RELATIONSHIP WITHCLIENT

EXPERIENCED EMPLOYEE

HIGH NETWORTHINDIVIDUAL CLIENT

Algo Trading

OPPORTUNITIES:

EMERGING NEWTECHNOLOGY

GROWING FIRM

WEAKNESS:

LIMITED WITHIN HNI CLIENT

LACKING OF BUSINESSDIVERSIFICATION

THREAT:

COMPETITORS HAVE SAMEPRODUCT/SERVICIES

BROKERAGE COMPETITION

RIVAL COMPETITION


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“New emerging trends in HNI lifestyle reflect ‘Ready for Change’ attitude”

“HNIs are now warming up to equities as compared to the lull or sideways movement that we

saw for last five years. The perceived risk has subsided and it is more to do with the hope thatthe country sees in structural reforms the new government will deliver. Today, UHNIs are in

strong contact with people globally and we realize India is gaining more traction among

emerging markets”

Number of High Net Worth Households (HNIs) increased by 16 per cent to 1,17,000 in

FY 2013-2014 from 100,900 in FY 2012-2013.

Metros dominate the geographic chart for UHNH distribution at 55 per cent and the

next top six cities (Bengaluru, Pune, Ahmedabad, Nagpur, Hyderabad and Ludhiana)

account for 16 per cent share.

Optimistic economic environment and hope for a stable political environment triggers

increase in expenses from 30 per cent in 2012 to 44 per cent in 2013.

Equity and Real Estate investments overtake Debt.

26 per cent of High Net Worth Individuals (HNIs) surveyed include Private Equity (PE)investments in their portfolios; Real Estate and IT emerge as top two sectors , and e-

commerce is a new favorite on the PE investment block for UHNIs.

Over 60 per cent of the UHNIs surveyed consider philanthropy while planning annual

expenditure; education (86 per cent) followed by ‘food for poor’ (79 per cent) get

preference.

Sources:wealthmanagement.kotak.com/topindia/index.html

LITERATURE REVIEW


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Introduction to High Net WorthIndividualIn INDIA:

“High net worth individuals gain more from Bull Run than retail investors”

-Ashutosh R Shyam, ET Bureau Feb 18, 2015, 09.34AM IST

“Super-rich: India records second highest growth in HNI population” -http://www.firstpost.com/Jun 20, 2014 08:55 IST

Who is a High Net Worth Individual (HNI)?

While there is no standard definition of HNIs

They can be based on Net Worth, Investible surplus, assets under advise

Most common standard in India

HNI: Investible surplus of Rs. 25 lac - Rs. 2 cr.

UHNI: Investible surplus of over Rs. 2 cr.(Source:www.icicidirect.com)

There is yet another superlative category in the segment known as Ultra high-net worth

individuals. As per a report, even amidst gloomy economic outlook, India recorded the

maximum growth in its Ultra High Net worth Individual (UHNIs) population amongst BRICS

nations in the last one year reaching at 7,850 super-rich individuals.

It has also been reported that India is home to the highest number of women millionaires

when compared with rest of the world with total fortunes to the tune of $95 million.

This boom in the HNI population in India was mainly on account of positive trend in the

stock market, real estate, gross national income, consumption and capitalization.


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High-net-worth Investors & Listed Options

Introduction

With the tremendous growth in the number of high-net-worth investors in the India over the

past couple decades, various investment tools have been utilized to help these investors meet

their financial goals — goals that often include preservation and growth of capital, and deferral

and minimization of taxes. This report will explore some of the many ways in which a very

flexible investment tool listed options — can help high-net-worth investors pursue their

financial goals.

Growth in High-net-worth MarketAccording to the Asia-Pacific Wealth report released by Merrill Lynch Wealth Management and

Capgemini, the combined wealth of Asia Pacific’s HNWIs is estimated to grow at 8.8% annually

till 2018, which is faster than the global average of 7.1% and India is likely to treble the high net

worth individuals’ (HNWIs) population and add $4 trillion to its wealth by 2018, leading its

growth in the Asia-Pacific region.

Possible Benefits of Using Listed OptionsThis will cover many of the possible benefits of using listed options in managing high-net-

worth88portfolios, including:

Reduces price volatility due to multiplematching of orders at a single price

Greater liquidity due to deeper demand

supply schedule

Better Price discovery

Minimized impact cost

Add flexibility to your investmentportfolio.

Create the possibility of speculative

gains using leverage.

Sell as easily as you can buy

Transfer risk quickly and efficiently


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What is Derivatives Contracts (Futures and Options)?

The derivative itself is merely a contract between two or more parties. Its value is determined

by fluctuations in the underlying asset. The most common underlying assets include stocks,

bonds, commodities, currencies, interest rates and market indexes. Most derivatives are

characterized by high leverage.

Futures:

A contractual agreement, generally made on the trading floor of a futures exchange, to buy

or sell a particular commodity or financial instrument at a pre-determined price in the

future.

Futures contracts detail the quality and quantity of the underlying asset; they are

standardized to facilitate trading on a futures exchange. Some futures contracts may call for

physical delivery of the asset, while others are settled in cash.

Options: An option provides the holder with the right to buy or sell a specified quantity of an

underlying asset at a fixed price (called a strike price or an exercise price) at or before the

expiration date of the option.

Since it is a right and not an obligation, the holder can choose not to exercise the right and

allow the option to expire.

There are two types of options - call options (right to buy) and put options (right to sell).

As under we can see how the actually future and options we can find from NSE website.


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Call Options:

A call option gives the buyer of the option the right to buy the underlying asset at a fixed price

(strike price or K) at any time prior to the expiration date of the option. The buyer pays a price

for this right.

Put Options:

A put option gives the buyer of the option the right to sell the underlying asset at a fixed price

at any time prior to the expiration date of the option. The buyer pays a price for this right.

Determinants of option value:

Level of Interest Rates

Strike Price of Options

Life of the Option

Expected dividends on the asset

Value of Underlying Asset

Volatility of asset price


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Before going into detail of options we have to consider some basic terms related

to options trading.

Index options: These options have the index as the underlying. In India, they have a European

style settlement. E.g. Nifty options, Mini Nifty options etc. ·

Stock options: Stock options are options on individual stocks. A stock option contract gives the

holder the right to buy or sell the underlying shares at the specified price.

Buyer of an option: The buyer of an option is the one who by paying the option premium buys

the right but not the obligation to exercise his option on the seller/writer.

Writer / seller of an option: The writer / seller of a call/put option is the one who receives the

option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him. ·

Option price/premium: Option price is the price which the option buyer pays to the optionseller. It is also referred to as the option premium. ·

Expiration date: The date specified in the options contract is known as the expiration date, the

exercise date, the strike date or the maturity.

Strike price: The price specified in the options contract is known as the strike price or the

exercise price.

In-the-money option: An in-the-money (ITM) option is an option that would lead to a positive

cash flow to the holder if it were exercised immediately. A call option on the index is said to be

in-the-money when the current index stands at a level higher than the strike price (i.e. spot

price > strike price). If the index is much higher than the strike price, the call is said to be deep

ITM. In the case of a put, the put is ITM if the index is below the strike price.

At-the-money option: An at-the-money (ATM) option is an option that would lead to zero cash

flow if it were exercised immediately. An option on the index is at-the-money when the current

index equals the strike price (i.e. spot price = strike price).

Out-of-the-money option: An out-of-the-money (OTM) option is an option that would lead to a

negative cash flow if it were exercised immediately. A call option on the index is out-of-the-

money when the current index stands at a level which is less than the strike price (i.e. spot price

< strike price). If the index is much lower than the strike price, the call is said to be deep OTM.

In the case of a put, the put is OTM if the index is above the strike price.


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Portfolio Concentrated in One Stock

Although this report will cover the risk management strategies for high-net-worth investors in

general, much of the report is focused on the risks faced by thousands of high-net-worth

entrepreneurs and employees of high-growth companies who must cope with the situation ofhaving most of their net worth attributed to one stock that may be restricted and may have a

low cost basis.

Many affluent investors are faced with the challenge of holding a concentrated position of a

single stock with a low tax basis. At some point, diversification of the holding becomes desirable

either from a personal perspective (increased income) or as a risk management maneuver (“too

many eggs in one basket”). However, income taxes stand to claim a significant portion of the

holding. The investor would like to accomplish four primary objectives:

i. Hedge: The investor wants to be hedged against a decrease in value of the stock.

ii. Defer Capital Gains Tax: The investor does not want to trigger a taxable event resulting in the

immediate recognition of a capital gains tax. Also, the investor would like the stock to receive

a “step-up” in basis in his or her estate upon his or her death.

iii. Gain Liquidity: The investor would like the ability to “monetize” the stock position (e.g.,

currently receive in cash a substantial portion of the market value of the stock position) at the

lowest possible cost.

iv. Diversify: The investor might reinvest some or all of the cash to diversify the portfolio.

(Listed options can help high-net-worth investors pursue the four above objectives)

Stocks, Listed Options and Tax Consequences: Numerous articles have noted the fact that income taxes can be a sizable drag on the

performance of investment portfolios of taxable investors, and that these investors should

bear in mind the tax consequences of their investment decisions.

Taxable portfolios can incur unwanted large realized capital gains if there is large turnover

(purchases and sales) of stocks in the underlying portfolio. One way to minimize taxes is to

use an “overlay” strategy, which leaves the underlying portfolio intact and uses overlay

tools such as options to take an investment position (which often is a hedging or contraryposition to the underlying portfolio).

Options strategies may have advantages over the outright sale of stock in that options can aid

an investor who would like to:

(1) Avoid the triggering of a taxable event resulting in the immediate recognition of a capital

gains tax.


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(2) Have the stock to receive a “step-up” in basis in his or her estate upon his or her death.

Growth in Listed Options Trading:

Annual trading volume in stock options has grown to record levels in recent years as individual

and institutional investors have increased their use of these products to manage various risks.

More banks and other financial services firms are offering options and other sophisticated

investment strategies to wealthy clients, reflecting the “view that some clients may be eager to

protect against a possible downturn in the stock market.”

(Options Value calculated as (Premium + Strike price) x Quantity)

In year 2009-10 the volume of index options was 3,978,699 and stock options volume was

116907 and in year 2013-14 volume of index options was 13,823,059 and stock options 865594

Rs. (Crore).around 80% growth noticed from year to year.

As above we can see that in last five year the trading in stock options is notably increasing. The

various benefits as above shown attract investors to trade in options.We can see that index

options currently have high volume then the stock options. Stock options have less volume

because most of traders prefer Intra-day trading because of high volatility and instant huge

profit. But there is also high risk with higher profit.

“The rising level of options trading shows that there is the rise in number of people who want

profit with risk hedging, without being greedy to take instant profit”

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

2009-102010-11

2011-122012-13

2013-14

O p t i o n s V o l u m e ( R s .

I n c r o r e )

Index Options Stock Options


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Options strategies for risk hedging Of HNIHigh-net-worth investors may consider numerous types of strategies that use exchange-listed

options.

A high-net-worth investor with stock concentration concerns could consider several strategies,

including:

Hedge the stock with put options,

Hedge the stock with a collar (long puts for protection plus short calls for income),

Diversifying with stock index options

Covered call writing for income.

A high-net-worth investor with a diversified portfolio could consider several strategies,

including:

Hedge the portfolio with protective stock index put position

Hedge the portfolio with a collar (long puts for protection plus short calls for income)

Covered call writing for income.

(The examples in this report are based on hypothetical situations and should only be considered

as examples of potential trading strategies. For the sake of simplicity, tax costs, commission

costs, and other transaction costs have been omitted from the examples.)

Strategy: 1-Protective Puts Purchased Against Stock:“The purchase of equity put options permits investors to limit the downside risk of stock

ownership while retaining the upside potential”

In this strategy, we purchase a stock since we feel bullish about it. But what if the price of

thestockwent down. You wish you had some insurance against the price fall. So buy a Put on

the stock. This gives you the right to sell the stock at a certain price which is the strike price.The strike price can be the price at which you bought the stock (ATM strike price) or slightly

below (OTM strike price).

In case the price of the stock rises you get the full benefit of the price rise. In case the price of

the stock falls, exercise the Put Option (remember Put is a right to sell). You have capped your

loss in this manner because the Put option stops your further losses. It is a strategy with a

limited loss and (after subtracting the Put premium) unlimited profit (from the stock price rise).

The result of this strategy looks like a Call Option Buy strategy and therefore is called a

Synthetic Call!

But the strategy is not Buy Call Option (Strategy 1). Here you have taken an exposure to an

underlying stock with the aim of holding it and reaping the benefits of price rise, dividends,

bonus rights etc. and at the same time insuring against an adverse price movement. In simplebuying of a Call Option, there is no underlying position in the stock but is entered into only to

take advantage of price movement in the underlying stock.


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* Breakeven is from the point of view of Mr. XYZ. He has to recover the cost of the Put Option

purchase price + the stock price to break even. In above our example,

Net Debit (payout) Stock Bought + Premium Paid-

Rs. 4000 + Rs. 143.80 =Rs. 4,14,380

Maximum Loss Stock Price + Put Premium – Put Strike

Rs. 4000 + Rs. 143.80 – Rs. 3900=Rs. 24,380

Maximum Gain Unlimited (as the stock rises)

Breakeven Put Strike + Put Premium + Stock Price – Put Strike

Rs. 3900 + Rs. 143.80 + Rs. 4000 – Rs. 3900=4143.80

The payoff scheduleXYZ Ltd. closes at

(Rs.) on expiry

Payoff from the

Stock (Rs.)

Net Payoff from the

Put Option (Rs.)

Net Payoff

(Rs.)

3400 -600 356.2 -243.8

3600 -400 156.2 -243.8

3800 -200 -43.8 -243.8

4000 0 -143.8 -143.8

4143.8 143.8 -143.8 0

4200 200 -143.8 56.2

4400 400 -143.8 256.2

4600 600 -143.8 456.2

4800 800 -143.8 656.2

When to use:

When ownership is desired of

stock yet investor is concerned

about near-term downside risk.

The outlook is conservatively

bullish.

Risk:

Losses limited to Stock price +

Put Premium – Put Strike price

Reward: Profit potential is

unlimited.

Break-even Point:

Put Strike Price + Put Premium +

Stock Price – Put Strike Price

Example:

Mr. XYZ is bullish about XYZ Ltd stock. He buys XYZ Ltd. at current

market price of Rs. 4000 on 4th July. To protect against fall in the

price of XYZ Ltd. (his risk), he buys an XYZ Ltd. Put option with a

strike price Rs. 3900 (OTM) at a premium of Rs. 143.80 expiring on

31st July.

Strategy : Buy Stock + Buy Put Option

Buy Stock

(Mr. XYZ

pays)

Current Market Price of XYZ Ltd.

(Rs.)

4000

Strike Price (Rs.) 3900

Buy Put (Mr.

XYZ pays)

Premium (Rs.) 143.8

Break Even Point (Rs.) (Put Strike

Price + Put Premium + Stock Price –

Put Strike Price)*

4143.8


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ANALYSIS

This is a low risk strategy. This is a strategy which limits the loss in case of fall in market but the

potential profit remains unlimited when the stock price rises. A good strategy when you buy a

stock for medium or long term, with the aim of protecting any downside risk. The pay-off

resembles a Call Option buy and is therefore called as Synthetic Long Call.

Option Lapse: If the investor allows his XYZ put options to lapse (that is, to expire without

exercise or sale), he is treated as if he sold the options. In that case, the cost of the premium he

paid to purchase the put options, plus any other commissions and fees, results in a capital loss.Except for a “married put” that qualifies as an identified straddle, the put and the investor’s

appreciated XYZ shares together result in a tax straddle. As a result, any loss recognized upon

lapse of the put option will be either long- or short-term, depending on the investor’s holding

period for his appreciated XYZ shares at the time he purchased the put options.

Option Exercise: If the investor exercises the put options, he must deliver XYZ stock. He can

either deliver the appreciated XYZ shares he currently owns, or he can buy XYZ stock in the

open market and deliver the new shares when he exercises the put options. To determine

whether his sale of XYZ stock upon exercise of the put options results in a tax gain or loss, he

compares the amount he realized on the sale of the shares to his tax basis in the shares he

delivers.


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Strategy: 2- Writing Covered Call Options on Stock

1) The price of XYZ Ltd. stays at or below Rs. 4000. The Call buyer will not exercise the Call

Option. Mr. A will keep the premium of Rs. 80. This is an income for him. So if the stock has

moved from Rs. 3850 (purchase price) to Rs. 3950, Mr. A makes Rs. 180/- [Rs. 3950 – Rs. 3850 +Rs. 80 (Premium) ] = An additional Rs. 80, because of the Call sold.

2) Suppose the price of XYZ Ltd. moves to Rs. 4100, then the Call Buyer will exercise the Call

Option and Mr. A will have to pay him Rs. 100 (loss on exercise of the Call Option). What would

Mr. A do and what will be his pay – off?

When to Use:

This is often employed when an

investor has a short-term neutral

to moderately bullish view on thestock he holds. He takes a short

position on the Call option to

generate income from the option

premium.

(Since the stock is purchased

simultaneously with writing

(selling) the Call, the strategy is

commonly referred to as “buy-

write”)

Risk:

If the Stock Price falls to zero, the

investor loses the entire value of

the Stock but retains the

premium, since the Call will not

be exercised against him. So

maximum risk = Stock Price Paid –

Call premium

Upside capped at the Strike price

plus the Premium received. So if

the Stock rises beyond the Strike

price the investor (Call seller)gives up all the gains on the

stock.

Reward:

Limited to (Call Strike Price –

Stock Price paid) + Premium

received

Example:

Mr. A bought XYZ Ltd. for Rs 3850 and simultaneously sells a Call

option at a strike price of Rs 4000. Which means Mr. A does not

think that the price of XYZ Ltd. will rise above Rs. 4000. However,in case it rises above Rs. 4000, Mr. A does not mind getting

exercised at that price and exiting the stock at Rs. 4000

(TARGET SELL PRICE = 3.90% return on the stock purchase price).

Mr. A receives a premium of Rs 80 for selling the Call. Thus net

outflow to Mr. A is (Rs. 3850 – Rs. 80) = Rs. 3770. He reduces the

cost of buying the stock by this strategy.

If the stock price stays at or below Rs. 4000, the Call option will

not get exercised and Mr. A can retain the Rs. 80 premium, which

is an extra income. If the stock price goes above Rs 4000, the Call

option will get exercised by the Call buyer. The entire position

will work like this:

Strategy : Buy Stock + Sell Call Option

Mr. A buys

stock XYZ

Ltd.

Market Price (Rs.) 3850

Call Options Strike Price (Rs.) 4000

Mr. A

receives

Premium (Rs.) 80

Break Even Point (Rs.)

(Stock Price paid -

Premium Received)

3770


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In above our example we have:

ANALYSIS:

Option Lapse:

a)Sell the Stock in the market at 4100

b)Pay Rs. 100 to the Call Options buyer -100

c)Pay Off (a – b) received 4000

d)Premium received on Selling Call Option 80e) Net payment (c + d) received by Mr. A 4080

f) Purchase price of XYZ Ltd. 3850

g)Net profit 4080-3850=230

h)Return (%) (Rs. 4080 – Rs. 3850) X

100/3850=5.97%

The payoff schedule

XYZ Ltd. price closes at (Rs.) Net Payoff (Rs.)

3600 -1703700 -70

3740 -30

3770 0

3800 30

3900 130

4000 230

4100 230

4200 230

4300 230


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If call options lapse (that is, expire without being exercised by the holder), the investor treats

the option premium he received (reduced by any commissions and fees he paid) as taxable gain

on the date of lapse. Regardless of the period the options were outstanding, he reports the

premium income on the lapse of the call options as a short-term capital gain.

Option Exercise: If the holder exercises call options, the investor must sell XYZ shares to the holder at the option

strike price. To determine whether the sale of XYZ stock in settlement of the call options results

in a tax gain or loss, the investor compares the amount realized on the sale of the shares to his

tax basis in the shares he sells.42 If the investor delivers the XYZ shares he currently owns and

the sale results in a gain, the gain is longer short-term, depending on his holding period for his

XYZ shares.

So,an investor who considers writing a covered call can calculate in advance an expected return

for the position if assignment is made and the stock is called away. Though early assignment is

always possible, it is somewhat predictable in certain cases before a dividend paid to underlyingshareholders.

Strategy: 3- Protective Collar on Stock

When to Use:

The collar is a good strategy

to use if the investor is

writing covered calls to earn

premiums but wishes to

protect him from anunexpected sharp drop in the

price of the underlying

security.

Risk:

Limited Reward: Limited

Breakeven:

Purchase Price of Underlying

– Call Premium + Put

Premium

Example

Suppose an investor Mr. A buys or is holding XYZ Ltd. currently

trading at Rs. 4758. He decides to establish a collar by writing a Call

of strike price Rs. 5000 for Rs. 39 while simultaneously purchasing a

Rs. 4700 strike price Put for Rs. 27. Since he pays Rs. 4758 for the

stock XYZ Ltd., another Rs. 27 for the Put but receives Rs. 39 forselling the Call option, his total investment is Rs. 4746.

Strategy : Buy Stock + Buy Put + Sell Call

xyz ltd Current Market Price (Rs.) 4758

Sell Call Option Strike Price (Rs.) 5000

Mr. A Receives Premium (Rs.) 39

Buy Put Option Strike Price (Rs.) 4700

Mr. A Pays Premium (Rs.) 27

Net Premium Received(Rs.) 12

Break Even Point (Rs.) 4746


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1) If the price of XYZ Ltd. rises to Rs. 5100 after a month, then,

a. Mr. A will sell the stock at Rs. 5100 earning him a profit of Rs. 342 (Rs. 5100 – Rs. 4758)

b. Mr. A will get exercised on the Call he sold and will have to pay Rs. 100.

c . The Put will expire worthless.

d. Net premium received for the Collar is Rs. 12

e. Adding (a + b + d) = Rs. 342 -100 – 12 = Rs. 254This is the maximum return on the Collar Strategy.

However, unlike a Covered Call, the downside risk here is also limited

2) If the price of XYZ Ltd. falls to Rs. 4400 after a month, then,

a. Mr. A loses Rs. 358 on the stock XYZ Ltd.

b. The Call expires worthless

c. The Put can be exercised by Mr. A and he will earn Rs. 300

d. Net premium received for the Collar is Rs. 12

e. Adding (a + b + d) = - Rs. 358 + 300 +12 = - Rs. 46

This is the maximum the investor can loose on the Collar Strategy. The Upside in this case is

much more than the downside risk.

The Payoff schedule

XYZ Ltd. closes

at (Rs.)

Payoff from Call

Sold (Rs.)

Payoff from Put

Purchased (Rs.)

Payoff from stock

XYZ Ltd.

Net payoff (Rs.)

4400 39 273 -358 -46

4450 39 223 -308 -46

4800 39 -27 42 54

4850 39 -27 92 104

5000 39 -27 242 254

5050 -11 -27 292 2545200 -161 -27 442 254

5250 -209 -27 490 254

5300 -211 -27 492 254

Analysis:


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Possible Outcomes

The Stock Rises – The portfolio participates in any upside move up to the strike price of the calls. Above

the current price level, losses from the short call position offset gains in the underlying stock. The puts

expire worthless.

The Stock Falls – The stock has protection on the downside. Below the current price level, gains from

the long put position offset losses in the underlying stock. The calls expire worthless.

The Stock Price Remains Stable – If the stock price remains between the put strike and the call strike,

the options expire. In this case, the total value of the stock position is increased by the net premium

received.

Strategy: 4- Long Index Call Options for Equity Market Exposure

The payoff schedule

On expiry Nifty closes at Net Payoff from Call Option

(Rs.)

4100 -36.35

4300 -36.35

4500 -36.35

4636.35 0

4700 63.65

4900 263.65

Buying a call is the most basic of all

options strategies. It constitutes the

first options trade for someone

already familiar with buying / selling

stocks and would now want to trade

options. Buying a call is an easy

strategy to understand. When you buy

it means you are bullish. Buying a Call

means you are very bullish and expect

the underlying stock / index to rise in

future.

When to Use:

Investor is very bullish on the stock /

index.

Risk:

Limited to the Premium. (Maximumloss if market expires at or below the

option strike price).

Reward:

Unlimited

Breakeven:

Strike Price + Premium

Example:

Mr. XYZ is bullish on Nifty on 24th June, when the Nifty is at

4191.10. He buys a call option with a strike price of Rs. 4600 at a

premium of Rs. 36.35, expiring on 31st July. If the Nifty goes

above 4636.35, Mr. XYZ will make a net profit (after deducting

the premium) on exercising the option. In case the Nifty stays ator falls below 4600, he can forego the option (it will expire

worthless) with a maximum loss of the premium.

Strategy : Buy Call Option

Current Nifty index 4191.1

Call Option Strike Price (Rs.) 4600

Mr. XYZ

Pays

Premium (Rs.) 36.35

Break Even Point (Rs.) (Strike Price +

Premium)

4636.35


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Analysis:

This strategy limits the downside risk to the extent of premium paid by Mr. XYZ (Rs. 36.35). But

the potential return is unlimited in case of rise in Nifty. A long call option is the simplest way tobenefit if you believe that the market will make an upward move and is the most common

choice among first time investors in Options. As the stock price / index rises the long Call move

into profit more and more quickly.

Strategy: 5- Long Index Put Options for Portfolio Protection

A long Put is a Bearish strategy.

To take advantage of a falling

market an investor can buy Put

options.

When to use:

Investor is bearish about the

stock / index.

Risk:

Limited to the amount of

Premium paid. (Maximum loss if

stock / index expire at or above

the option strike price).

Reward:

Unlimited

Break-even Point:

Stock Price - Premium

Example:

Mr. XYZ is bearish on Nifty on 24th June, when the Nifty is at

2694. He buys a Put option with a strike price Rs. 2600 at a

premium of Rs. 52, expiring on 31st July. If the Nifty goes below2548, Mr. XYZ will make a profit on exercising the option. In case

the Nifty rises above 2600, he can forego the option (it will expire

worthless) with a maximum loss of the premium.

Strategy : Buy Put Option

Current Nifty index 2694

Put

Option


Mr. XYZ

Pays

Premium (Rs.) 52

Break Even Point (Rs.) (Strike Price -

Premium)

2548


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The payoff schedule

On expiry Nifty

closes at

Net Payoff from Put purchased

(Rs.)

Net Payoff from Call purchased

(Rs.)

Net Payoff

(Rs.)

4200 215 -122 93

4234 181 -122 59

4293 122 -122 0

4300 115 -122 -7

4400 15 -122 -107

When to use:

The investor thinks that the

underlying stock / index will

experience significant volatility in

the near term.Risk:

Limited to the initial premium paid.

Reward:

Unlimited

Break-even Point:

Upper Breakeven Point = Strike Price

of Long Call + Net Premium Paid

Lower Breakeven Point = Strike Price

of Long Put - Net Premium Paid

Example:Suppose Nifty is at 4450 on 27th April. An investor, Mr. Aenters a long straddle by buying a May Rs 4500 Nifty Put

for Rs. 85 and a May Rs. 4500 Nifty Call for Rs. 122. Thenet debit taken to enter the trade is Rs 207, which is alsohis maximum possible loss.

Strategy : Buy Put + Buy Call

Nifty

index

Current Value 4450

Call and

Put


Mr. A

pays

Total Premium(Call + Put) (Rs.) 207

Break Even Point

(Rs.)

4707(U)

(Rs.) 4293(L)


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Strategy: 7- Short StraddleA Short Straddle is the opposite of Long Straddle. It is a strategy to be adopted when the

investor feels the market will not show much movement. He sells a Call and a Put on the same

stock / index for the same maturity and strike price. It creates a net income for the investor. If

the stock / index do not move much in either direction, the investor retains the Premium as

neither the Call nor the Put will be exercised.

However, in case the stock / index moves in either direction, up or down significantly, the

investor’s losses can be significant. So this is a risky strategy and should be carefully adopted

and only when the expected volatility in the market is limited. If the stock / index value stays

close to the strike price on expiry of the contracts, maximum gain, which is the Premium

received is made.

The payoff schedule

On expiry Nifty

closes at

Net Payoff from Put purchased

(Rs.)

Net Payoff from Call purchased

(Rs.)

Net Payoff

(Rs.)

4200 -215 122 -93

4234 -181 122 -59

4293 -122 122 0

4300 -115 122 7

4400 -15 122 107

When to use:The investor thinks that the

underlying stock / index willexperience very little volatility inthe near term.

Risk:Unlimited Reward:Limited to the premium received

Break-even Point:

Upper Breakeven Point = Strike

Price of Short Call + Net PremiumReceived

Lower Breakeven Point = StrikePrice of Short Put - Net PremiumReceived

Example:

Suppose Nifty is at 4450 on 27th April. An investor, Mr. A,

enters into a short straddle by selling a May Rs 4500 Nifty Put

for Rs. 85 and a May Rs. 4500 Nifty Call for Rs. 122. The net

credit received is Rs. 207, which is also his maximum possible

profit.

Strategy : Sell Put + Sell Call

Nifty index Current Value 4450

Call and Put Strike Price (Rs.) 4500

Mr. A receives Total Premium(Call + Put) (Rs.) 207

Break Even Point

(Rs.)*

4707(U)

(Rs.)* 4293(L)

* From buyer’s point of view


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Strategy: 8- Long Call Butterfly

A long butterfly is similar to a Short Straddle except your losses are limited. The strategycan be done by selling 2 ATM Calls, buying 1 ITM Call, and buying 1 OTM Call options (there

should be equidistance between the strike prices).

Strategy: - Short Call ButterflyA Short Call Butterfly is a strategy for volatile markets. It is the opposite of Long Call

Butterfly, which is a range bound strategy. The Short Call Butterfly can be constructed bySelling one lower striking in-the-money Call, buying two at-the-money Calls and sellinganother higher strike out-of-the-money Call, giving the investor a net credit (therefore it is

an income strategy).

Points to be Note:

All strategy above shows the different pay off on the bases of the market conditions.

Investors should consider the above strategy as the guidance purpose. If investors or trader are sure on the prevalent market conditions they can get reward or

insure their portfolio.

Sometime investors stick to their own decision and may be face loss, so it is better to

consult investment advisor or broking firm.


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Current Scenario of HNI’s Investment &Investment Options Available for HNI in

India:

HNI segment reports 8.21% rise in MF folios (ET-22/04/2015) Stock trading falls as retail, HNIs stay away from market (ET-10/06/2015)

Are HNI investors postponing their equity investments now?

(http://wealthmanagement.kotak.com/media/to-invest-in-gold-take-sip-route)

According to the World Wealth Report 2014, released by Capgemini and RBC(Royal Bank of

Canada) Wealth Management, more than 90% of India's High Net-Worth Individuals (HNWIs)

seek to achieve more than just monetary returns while managing their wealth.

Karvy’s India wealth report, 2014 highlights that Indians Individuals holding Rs 202 Lakh crore

wealth today may see their wealth double in next five years.By the end of next five years i.e.2018, Karvy Private Wealth report expects overall Individual wealth to increase to Rs 411 Lakh

crores.

Surprisingly more than half of Individuals wealth today i.e. Rs 110 lakh crore comprises of

financial assets, whereas only Rs 92 lakh crore of total Rs 202 lakh crore is held in physical

assets. The physical assets include assets as Real estate and Gold whereas excludes homes that

individuals own and use for their own living. The breakup of financial assets springs out more

surprises. Out of Rs 110 Lakh crore while fixed deposits and Bonds constitute 23%, Direct Equity

constitutes 22.1% and Insurance 17.2%. Mutual funds constitute only 3.2% while saving

deposits cash and small savings constitute 13.7, 10.4 and 5.1% each.

However looking at the break-up of private equity 38.66% (Rs 9.14 lakh crore) of 24.31 lakh

crore is what direct individuals have purchased while rest is promoters holdings (in individual

capacities). He added that while currently around 86.6% of Indians own home currently, the

percentage should increase to around 91.1 in a few years.

Also in the coming years, we see a reversal in the trend of very high fresh inflows while going

into physical assets as i believe that macro-environmental conditions should bottom out in

2016, and financial Assets will start finding favor again. The India story has only taken a break.

http://www.business-standard.com/search?type=news&q=World+Wealth+Reporthttps://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0CDMQFjACahUKEwj5z_G1s4nGAhWhe6YKHaVtANc&url=http%3A%2F%2Fwww.rbc.com%2F&ei=O2t6VbnGHaH3mQWl24G4DQ&usg=AFQjCNHi_sN1WTgG0QOgKwL04k2DnFfKdw&bvm=bv.95515949,d.dGYhttps://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0CDMQFjACahUKEwj5z_G1s4nGAhWhe6YKHaVtANc&url=http%3A%2F%2Fwww.rbc.com%2F&ei=O2t6VbnGHaH3mQWl24G4DQ&usg=AFQjCNHi_sN1WTgG0QOgKwL04k2DnFfKdw&bvm=bv.95515949,d.dGYhttp://www.business-standard.com/search?type=news&q=High+Net-worth+Individualshttp://www.business-standard.com/search?type=news&q=Wealth+Reporthttp://www.business-standard.com/search?type=news&q=Karvyhttp://www.business-standard.com/search?type=news&q=Physical+Assetshttp://www.business-standard.com/search?type=news&q=Real+Estatehttp://www.business-standard.com/search?type=news&q=Financial+Assetshttp://www.business-standard.com/search?type=news&q=Financial+Assetshttp://www.business-standard.com/search?type=news&q=Real+Estatehttp://www.business-standard.com/search?type=news&q=Physical+Assetshttp://www.business-standard.com/search?type=news&q=Karvyhttp://www.business-standard.com/search?type=news&q=Wealth+Reporthttp://www.business-standard.com/search?type=news&q=High+Net-worth+Individualshttps://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0CDMQFjACahUKEwj5z_G1s4nGAhWhe6YKHaVtANc&url=http%3A%2F%2Fwww.rbc.com%2F&ei=O2t6VbnGHaH3mQWl24G4DQ&usg=AFQjCNHi_sN1WTgG0QOgKwL04k2DnFfKdw&bvm=bv.95515949,d.dGYhttps://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0CDMQFjACahUKEwj5z_G1s4nGAhWhe6YKHaVtANc&url=http%3A%2F%2Fwww.rbc.com%2F&ei=O2t6VbnGHaH3mQWl24G4DQ&usg=AFQjCNHi_sN1WTgG0QOgKwL04k2DnFfKdw&bvm=bv.95515949,d.dGYhttp://www.business-standard.com/search?type=news&q=World+Wealth+Report


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Investment options for HNIs: High net-worth individuals (HNIs) are those who have substantial and excessive resources to

invest. There is no standard definition of HNIs and the criterion varies from bank to bank.

More than safety, the main objective of HNIs is to earn capital appreciation and income

from investments. They normally don't need to worry about the safety of their capital. Theygenerally have the appetite to invest in high risk instruments and avenues, and as such are

not risk averse. Higher the risk, higher is the returns. These are investors who can afford to

take higher risks.

Most of the developed nations hardly have any investment opportunities which generate

returns greater than 6-10 percent as compared to the Equity markets which have

generated over 87 percent over the last year. Most of the mutual fund houses operating in

India have generated returns over 50 percent compounded annually over the last 3-4 years.

Though in the coming years the expectation is 15-20 percent , it still is quite high as

compared to what one can make in the developed markets

Creating wealth is one thing. Managingwealth is quite another. The total wealth

of persons of Indian origin is estimated to

be about $560 billion. Out of that, onshore

is $260 billion and offshore is $300 billion.

This niche segment is growing by 20

percent per annum. Indian economy is

expected to grow by 7-9 percent in the

coming years. With the growth in the

economy, the HNI segment is also slated to

grow.

HNIs have a good amount of disposable income and little responsibilities in terms of

providing for the family. For a country which has very favorable demographics and is

predicted to have the highest percentage of young people by 2010, the potential is

immense. Every investment option will at some point of time be more attractive than the

others because of the prevalent economic, capital market and political scenario.

Asset allocation is the process of determining an optimal mix of asset classes to invest in.

This may consist of equity, debt, gold, real estate, mutual funds art, private equity,

structured products, and hedge funds and managed funds. The investment portfolio

depends on the investors' time horizon and risk appetite, as well as tax considerations. One

needs to balance out the risk and return aspects. Asset allocation would depend on the

investible surplus available with the investor.Some avenues for HNIs:

Property

Real estate is escalating fast. The real estate market is growing at a pace of about 30-35 percent

annually. The demand for realty is on a high growth path. The demand for residential and

commercial properties is increasing. Investment in property requires a good amount of capital.

With the property prices rising day by day, it may offer a good source of returns.


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Page | 39

Equity

The stock markets have been rocking. Lately, there has been a downturn, but most of it is a

correction. India is a growth story. HNIs can invest in stocks depending on their fair valuation.

There is still plenty of value in the market waiting to be exploited. Portfolio management

services of experts may be used. Stocks with strong fundamentals and a good growth potential

need to be included in the portfolio.

Art

Another avenue fast catching up is investment in art. However, it needs specialization to select

and invest. Investing in modern and contemporary works is increasing. With the newly-

launched art funds, the asset class is beginning to offer a fair amount of liquidity. Art may be

considered as a serious investment form as it can diversify a portfolio.

Debt

Debt is an attractive investment avenue for investors. Investors may invest in products like

arbitrage funds, which offer higher return than conventional income funds. With gradual

increase in the interest rates, debt securities may also offer decent returns. In India the

secondary market for trading in debt securities is still not very well developed.

Mutual funds

These are a common investment avenue in any investment portfolio.

Realty funds: Realty funds offer another source of investment for HNIs. These funds cater to

HNIs only. They invest in realty and earn income through rent as well as capital appreciation.

Venture capital funds: This is another major area of investment. Venture capitalists fund new

and risky projects. HNIs may join hands with or invest in venture capital funds. The risks are

high. So are the rewards, if the project is successful.

Gold

Along with stock markets and realty, gold also touched historic peaks. Gold funds have been

launched. HNIs may invest directly in gold or through the gold funds. Investment in gold,through purchase of gold or through investment in gold funds, is picking up.

Private equity

There are a number of entrepreneurs who have the requisite skills and calibre to start new

projects, but don't have the funds. Still others may have a small equity base and potentially

sound projects but not enough capital. HNIs may invest in private equity of these promoters

and exit once the project becomes viable and ready for public offer.

Why investment in equity and also Options in derivative is good for

HNI?

It is called the curse of the excess. Whether through inheritance or through entrepreneurial

ability, individuals who come to possess big money sometimes fail to do the right thing with

it – invest it efficiently. Another set of wealthy individuals are the fence-sitters, who

endlessly wait for the ‘Right time’ to invest and in the bargain miss out on the opportunity.

Then there are those who are fixated to specific asset classes and invest only in them

without bothering about high concentration risk.


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The fundamental investing strategy and approach does not differ significantly for different

portfolio sizes. It should consider goals, time horizon and risk-return expectation from the

overall portfolio. However bigger portfolios gives additional options (requiring large ticket

sizes) and brings complications around tax, holding structure and succession planning which

needs to be carefully considered and planned from the portfolio inception stage itself.

The most important aspect to be kept in mind in devising any investment plan is to ensure

that over long period of time the investment should yield positive real returns. The drag of

inflation and taxes makes good looking nominal returns from Debt/Fixed deposit

investments erode capital in real terms. Long term Debt returns of 7% with 5% inflation and

30% tax on interest income leads to negative real returns. Hence importance of adding

Growth asset class (Equities, Real Estate and Private Equities) in portfolio in varying

composition as per risk-reward matrix becomes paramount.

Research done on historical performances of various Equity and Debt indices over long

periods of time shows that a combination of 20% Growth assets with 80% Income yielding

assets will generate 1-1.5% real returns after accounting for long term inflation and taxes.

Although in shorter periods of time this 20% growth asset will be volatile and show negative

impact on portfolio, history shows that over long periods, investing in good quality growth

assets yield better returns than Debt.

Similarly an aggressive investor who is more keen to grow his wealth by taking some risk on

capital in shorter periods can look at a portfolio of 80% in growth assets and 20% in Income

assets and aim to generate around 7% - 10% p.a. real returns. Once the broad asset

allocation between growth and Income are arrived after considering short term risk on

capital, liquidity and other goals, it is also very important to keep this allocation dynamic to

changing market scenario. Though drastic shifts in this allocation may not be warranted a10% -15% positive or negative allocations to Growth and Income assets are helpful to take

tactical advantage on macroeconomic and global scenarios being favorable or not.

The next step after fixing the asset allocation and tactical calls is to choose the right

investment categories and vehicles. While Debt Mutual Funds are much more tax efficient

than Interest bearing bonds due to long term capital gains getting taxed at 10% for Debt

MFs and interest from bonds being taxed at 30%, some well researched and high yielding

bonds/NCDs (like to prudent real estate developers) can offset the negative tax impact on

interest income by higher coupons.

Similarly equity investments could be made through Funds, PMS or buying shares directly.

While each approach has its own merits and limitations, investors should evaluate their

preferences and expertise in the most unbiased and detached manner to make the decision

best suited for them. Allocation to a particular category of investments and specific

schemes/products also needs to be relevant to total portfolio size.


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A classic mistake made by many investors even after having a well-defined Asset allocation

strategy is to under or over allocate to a specific idea by looking at absolute investment

amount and not in context of total portfolio size.

Apart from the key approach stated above, mentioned below are some other areas which need

careful deliberation in HNI investment planning process:

Liquidity requirement:

It is not always true that an affluent individual has very low liquidity requirement from existing

wealth. If major chunk of wealth is inherited from earlier generation in the form of immovable

properties, then liquidity from this inheritance can be constricted. If the individual doesn’t

have any other source of income, then he/she will have to generate rental yield from that asset

and supplement it with income stream from existing investments.

Investment horizon:

This is dictated by the stated financial goals. Longer horizon accords the luxury to choose from a

wide array of high return generating investments. Riskiness of investments lowers substantially

over the long term. Typically equity and alternative investments require longer horizon to reap

best results. Also avoid the trap of mixing between investment horizons with review frequency.

For monies not need for long periods, approach to invest in products with short maturity and

then renewing it every time may be less optimal than locking it for longer periods with option

to do course correction if it does fare well.

Global Allocation:

A part of portfolio getting geographically diversified not only provides a good hedge against

geopolitical risks and currency but also provides options to invest in areas, ideas and themes

which may not be available in domestic markets. There are multiple ways in which an HNI canparticipate in Global Markets. Feeder Funds and Liberalized Remittance scheme is two most

easily available routes to take such exposure.

Investment Policy, Governance and Family Constitution:

These are some of the tools very relevant for smooth functioning of investment strategy in a

large family. Clearly defining the investment policy framework, ,spelling out goals and

objectives clearly, documenting dos and don’ts , decision making and conflict resolution process

and having an investment committee helps tremendously in remaining aligned to long term

objective by keeping all stakeholders involved.

To conclude, protecting, growing, managing and transferring wealth to next generation is as or

sometimes more difficult than creating wealth. More often than not this is the area which does

not come naturally to wealth owner like their business. A carefully thought through objectives

and well defined process along formal planning with experts and advisors can surely help HNI

investors in making a long term stable portfolio and avoiding the common pitfalls highlighted

above.


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History of Crash in Indian Stock Market:

It was a Terrible Tuesday for the bourses. The

Sensex saw its biggest intra-day fall when it hit a

low of 15,332, down 2,273 points. However, it

recovered losses to some extent and closed at a

loss of 875 points at 16,730.Trading was

suspended for one hour at the Bombay Stock

Exchange after the benchmark Sensex crashed to

a low of 15,576.30 within minutes of opening,

crossing the circuit limit of 10 per cent.

Investors on Tuesday lost over Rs. 6 lakh crore (Rs. 6 trillion) within minutes of opening of the

Bombay Stock Exchange, which was immediately suspended for an hour after the 30-sharebarometer index, Sensex, hit the circuit limit of 10 per cent.

This loss of Rs 6, 54,887 crore (Rs 6.548 trillion) comes on top of over Rs 11 trillion loss suffered

by investors on the Dalal Street in the last six days.

“Sensex slumps 855 points; 7th worst single-day fall in history”-6th

January, 2015

The Sensex posted its seventh biggest single-day fall in history, amid weak global cues, after the

sharp fall in global crude oil prices raised worries over global growth slowdown and the political

uncertainty in Greece also weighed on market sentiment.

The 30-share Sensex ended down 854.86 points or 3.1% at 26,987.46 and the 50-share Niftyended down 251.05 points or 3% at 8,127.35.

(Oil prices slumped to new 5-1/2-year lows on Monday on worries about a surplus of global

supplies and lackluster demand. The two crude oil benchmarks - Brent and U.S. light crude, also

known as West Texas Intermediate - have now lost more than half of their value since mid-

2014. Globally traders also turned risk averse over apprehensions of Greece defaulting on its

loans and losing its status as a Euro zone country which became more pronounced with the

leftist Syriza party, committed to roll back austerity measures, emerging as the front-runner for

the January 25 election


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What was all above?

When the stock market crash happens it’s not only drags your money but also make your

portfolio half compare to previous portfolio. So now question arise that what should we do

to prevent your portfolio from sudden drop?

The investors who have lost their money in stock market crash should have used some

options strategy with the stock buying so that they can prevent their investment from this

type of sudden market crash.

In my report I have mention the some strategy which will help to reduce sudden drop in the

portfolio of investors specially HNI.

Example of One Client from Arya Fin-Trade Services (India) Pvt. Ltd.:

(Live Market Screen of Arya Fin Trade Services (India) Pvt. Ltd.)

Every risk hedge has a cost, so before you decide to use hedging, you must ask yourself if the

benefits received from it justify the expense. Remember, the goal of hedging isn't to make

money but to protect from losses. The cost of the hedge - whether it is the cost of an option or

lost profits from being on the wrong side of a futures contract - cannot be avoided. This is the

price you have to pay to avoid uncertainty.


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Assumptions:

Mr. X is very conservative towards safety of principal.

In every month the number of stocks in all companies is same, so investment may vary

slightly.

He holds stock till the end of month and buys new put options at beginning of month.

The closing price of stock is on every months options clearing date.The strike price is slightly OTM.

The motive behind the covered put strategy is the risk hedging of stocks when price of the

stock goes down and lesser the loss.

The example does not include transaction costs in the calculations

As under I have taken assumed portfolio of one client X of Arya Group. He has portfolio of 50

lakh Rs. and He is dealing with mostly the more volatile stocks. So I have picked up 5 stocks and

allocated into the approximately equal investment value.

If X bought stock on 1st

January, 2015 then as under:

Name of stock mkt. Price 1

jan,2015

No of shares Total investment Stock price as on

29th jan,2015

Profit or loss

Hero Moto corp 3111 375 1166625 2865 1074375

Cipla 626 1500 939000 695 1042500

SBI 312 3000 936000 308 924000

ONGC 340 3000 1020000 351 1053000

TCS 2554 375 957750 2480 930000

TOTAL 5019375 5023875

After covered put strategy:

Name of

stock

investment Strike

price

Total put value Total

investment

P/L (put

exercised)

Net P/L

put put

value

Stock price

as on 29th

jan,2015

Hero Moto

corp

1166625 2990 (38*375)=14250 14250 2865 1180875 1121250 1107000

Cipla 939000 610 (10*1500)=15000 15000 695 954000 No 1027500

SBI 936000 300 (3.4*3000)=10200 10200 308 946200 924000 913800

ONGC 1020000 325 (4.8*3000)=14400 14400 351 1034400 No 1038600

TCS 957750 2540 (31*375)=11625 11625 2480 969375 952500 940875

Total 5019375 65475 5027775

As above at the end of month January profit are 5023875 but with risk hedging it 5027775 after

deduction of put cost 65475!


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Now when put options does not exercise it automatically expires and became zero value, and

put option which exercise on strike price this stocks automatically sold out. Now on next month

X again buys the same number of stocks which square off.

Name of stock mkt. Price 1

feb,2015

No of shares Total investment Stock price as on

26th feb,2015

Profit or loss

Hero Moto corp 2877 375 1078875 2672 1002000

Cipla 698 1500 1047000 670 1005000

SBI 309 3000 927000 270 810000

ONGC 352 3000 1056000 324 972000

TCS 2482 375 930750 2663 998625

TOTAL 5039625 4787625


The above February month data shows loss at the end of month and with put strategy it is alsoloss. But there is less loss then the unhedged portfolio.

When you cannot stop the loss it is better to make lesser it by paying some cost of hedging

when buying stock.

Name of

stock

investment Strike

price


investment

P/L (put

exercised)

Net P/L

put put

value

Stock price as

on 26th

feb,2015

Hero

Moto

corp

1078875 2860 (37*375)=13875 13875 2672 1092750 1072500 1058625

Cipla 1047000 680 (10.1*1500)=15150 15150 670 1062150 1020000 1005000

SBI 927000 290 (3.3*3000)=9900 9900 300 936900 870000 860100

ONGC 1056000 335 (4.6*3000)=13800 13800 324 1069800 1005000 991200

TCS 930750 2465 (29.75*375)=11067 11067 2663 941817 924375 913308

TOTAL 5039625 63792 4828233


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Now after two past months example below is the example of the last month.

Name of

stock

mkt. Price 1

june,2015

No of

shares

Total investment Stock price

as on 25th

june,2015

Profit or loss

Hero Moto

corp

2678 375 1004250 2550 956250

Cipla 645 1500 967500 590 885000

SBI 278 3000 834000 245 735000

ONGC 324 3000 972000 288 864000

TCS 2610 375 978750 2567 962625

TOTAL 4756500 4402875


Name

of

stock

investment Strike

price


investment

P/L (put

exercised)

Net P/L

put put value Stock price

as on 25th

june,2015

Hero

Moto

corp

1004250 2660 (31.2*375)=11700 11700 2550 1015950 997500 985800

Cipla 967500 630 (7.9*1500)=11850 11850 590 979350 945000 933150

SBI 834000 265 (3.4*3000)=10200 10200 245 844200 795000 784800

ONGC 972000 310 (3.9*3000)=11700 11700 288 983700 930000 918300

TCS 978750 2590 (31*375)=11625 11625 2567 990375 971250 959625

Total 4756500 57075 4581675

Below table shows the comparison of hedged and unhedged portfolio of last six month.

Month(2015) Total

Investment

Put

Cost

Hedged

Portfolio

UnHedged Portfolio

January 5019375 64917 5028333 5023875

February 5039625 63792 4828233 4787625

March 4938650 58741 4525665 4725800

April 4878550 66274 4958965 5065485

May 4987850 61065 4658985 4778965

June 4756500 57075 4581675 4402875


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Need and Usefulness of the Research:

Arya Fin-Trade Services (India) Pvt. Ltd.:

This study will be most useful for Arya Fin-Trade Services (India) Pvt. Ltd. because currently

company’s most of the clients are High Networth Individuals (HNI). Company’s top

management can use my research to know the behavior of the HNI clients, the investment

pattern, risk taking ability, and willingness to do stock options trading etc. The company can

either suggest this strategy to its clients or can make some changes and then suggest the same.

Investors:

This study will also be helpful for the investors to know the benefits of Stock options trading.

How to prevent the investment in stock, when stock price suddenly fall down. Investors alsoinsure their investment buy just paying minor premium and if strategy goes true then get

unlimited reward.

Students:

The students can find basic idea of the derivatives market and also various options strategies.

Options trading basic in Indian stock market. They can also find research data on HNI and

behavior of HNI clients.


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Research Objectives:

To know the behavior of High Networth Investors.

To know investment pattern of HNI clients.

To know attitude of HNI investors towards investment in equity.

To obtain the details of risk tolerance level and preferred investment period of HNI. To know the willingness to trade in equity with options trading

(Using risk management services).

To know awareness of options strategy.

Population:

All client of Arya Fin Group (Ahmedabad)

Sampling Frame:

List of HNI clients of Arya Fin Group

Sampling technique

Census Method (Non-Probability sampling)

Sample size:

84

Research design :Descriptive

Sampling tool:Online questionnaire

Limitation of the research:

The result of the analysis may change depending on the time period. This analysis we have to consider only the short term decision making.

There is no flexible trading in future contract because it is a standardized contract.

This study focused on particular companies only.


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Data analysis and interpretation:

Gender allocation:

Gender Total

Male 52

Female 10

Total 62

Interpretation:

In the survey there is mostly male respondents and few number of female respondents. out oftotal respondents 84% male and 16% female respondents. Most of the HNI clients are males.

Male

84%

Female

16%

Gender


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Age allocation:

Age Group Total

Below 25 12

25 to 35 17

35 to 45 22

45 to 60 10

Above 60 1

Total 62

Interpretation:

There is highest age group of 35 yr to 45 yr. above the age of 60 only 2% respondents. the

number of respondents below age of 25 is also average. The change age group of HNI people

mostly falls between 35 to 60 year. The opinion or answer may be vary by change into age

group.

19%

27%36%

16%

2%

Age Group

Below 25 25 to 35 35 to 45 45 to 60 Above 60


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Occupation of the respondents:

Occupation Total

Professional 19Manager/official/proprietor 14

Trade/craft 20

Retired 1

Homemaker 4

Other 4

Total 62

Interpretation:

Most of the occupation of the respondents is trade and business. Out of the 62 respondents the

there is 20 trader and craft. Second largest occupation group is professionals. Which is 19 out of

62 respondents and most of them are C.A. and doctors. There only one retired client.

19

14

20

1

4

4

0 5 10 15 20 25

Professional

Manager/official/proprietor

Trade/craft

Retired

Homemaker

Other


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Income level of the respondents:

Yearly Income Total

Below 10 5

10 to 25 1325 to 50 29

50 to 1 core 9

Above 1 core 6

Total 62

Interpretation:

As the definition of the HNI clients I have targeted the most of the higher income group. The

most of respondents fall under the income bracket of 25 to 50 lakhs. Out of the total 62

respondents there are only 8 % respondents have income below 10 lakhs. There is only 10%

respondents fall under the group of above 1 crore.

8%

21%

47%

14%

10%

Income Rs.

Below 10 10 to 25 25 to 50 50 to 1 core Above 1 core


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Investment options for the HNI investors:

Saving Option percentage

Equity 12

Bonds 12

FD 8

Mutual Fund 9

Commodity 22

Real Estate 15

Private Equity Investment 12

Investment in Gold and Silver 6

Other 4

Total 100

Interpretation:

There is many investment options available for HNI clients. I have selected some of the most

famous options and in that all clients invest according to their own preference and need. At

Arya Fin Trade Services (India) most of the clients invest in commodity market.

0 5 10 15 20 25

Equity

Bonds

FD

Mutual Fund

Commodity

Real Estate

Private Equity Investment

Investment in Gold and Silver

Other

percentage


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Time period investors prefer to invest?

Time period Total

Short Term 15

Medium 24

Long Term 23

Interpretation:

The change in the terms of the investment depends of the availability of the funds to the clients

and how they has the capacity to b

bhavesh sip report

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