What are Derivatives?


Just imagine, how amazing it would be if we could predict the future. Hold this thought and imagine further how amazing it would be if we could predict the future prices of various financial assets and make money out of them. I am sure my last statement might have created some sort of excitement amongst you all. But the question remains of “How?” Well, there’s something known as derivative instruments in our financial market which can help us do this. But obviously, it’s not as easy as it sounds and as usual, I have got you covered! So, sit back as we unfold the complex world of the Derivatives market in the most simplified manner. Let’s get started!

What are Derivatives?

Derivatives are financial contracts that derive their value from the underlying assets. Confused? Let’s break it down one by one. A derivative instrument is a contract between a buyer and a seller based on their views about an underlying assets’ future price movement. An underlying asset can be any financial instrument like stocks, bonds, commodities, currencies, interest rates and even indices. So, the value at which this contract or derivative instrument is traded is based on the value of its underlying asset. For instance, in the case of a stock derivative say- RIL, the contract/derivative value will increase when RIL’s value increases. Note that you are trading a contract and not the underlying itself. Since its value is derived from an underlying (RIL from our example), this contract is known as a “Derivative instrument”.

History of the Derivatives market

Right from the Greek civilization to the present electronic trading, derivative instruments are believed to be present in the financial markets’ history for a long time. They are said to have existed in the cultures of Mesopotamia during the Greek civilization. Once, one of Aristotle’s followers named Thales, studying meteorology predicted that the olive crops would give a good yield that year. So, he went ahead and purchased all the olive produce around Athens even before they were harvested. As predicted by Thales, the olive produce turned out great and he made profits ahead with the help of derivative instruments.

What about the world’s largest economy, the US? In the 19th century, American farmers could not find buyers for their commodities. Later, they went ahead and formed the Chicago Board of Trade which evolved into the first-ever derivatives market dealing in standardized contracts. But where was India when the financial market was witnessing this essential change? Well, in the case of India, derivative instrument trading started in 1875 with the establishment of the Bombay Cotton Trading Association. There was a time post-independence when cash settlement and options trading was banned however, later it was uplifted with the creation of the National Electronics Commodities Exchange. And the rest is history.

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What is the purpose of Derivatives?

Derivatives are primarily used for hedging and speculation purposes. Now, don’t get scared by these big words, I am here to make it easy for you.


1. Hedging

To put it very simply for you, hedging means taking a position to limit your losses due to price fluctuations in the market. As derivatives are considered to be high-risk instruments, hedging plays an important role in minimizing the losses by taking an opposite position. This proves to be a good cushion for both investors and businesses to protect their portfolios during volatility.

 2. Speculating

We all speculate about certain things on a daily basis. For instance, if you observe cloudy weather, you speculate that it will rain soon and hence carry an umbrella. Similarly, in the derivatives market, if you think the markets might go up and take a position accordingly then you are speculating. Speculating purely involves taking a position based on your views about an asset with an intent to generate profit. These are usually hunches or guesses based on the price movement. Unlike hedgers who try to minimize their risk, speculators try to make profits by taking a high risk.

3. Arbitrage

The main aim of arbitrage is to earn profits from the difference in the price of an asset in different market segments. It involves buying an asset from a market (say spot market) where the price is lower and simultaneously selling it on another market (say futures market) where it is trading at a higher price. Arbitrage involves relatively low risk. However, due to market efficiency theory, such opportunities can be hard to find.

Bottom line

Derivatives are often used by businesses that can be largely affected on an operational level due to fluctuating prices of certain commodities. This helps them to reduce their market risk and protects their bottom line. Retail investors must note that even though there’s huge profit potential in derivatives there’s an equal or more probability of losing. It is important to have extremely good knowledge about the stock market, technical analysis and derivatives, to trade in the derivatives market. There’s a lot more to learn about derivatives and their various types, mainly Futures and Options. I am very excited and thrilled to share that my most awaited course on Futures & Options is releasing tomorrow. Make sure you check it out here to learn many more interesting concepts and strategies in the most fun and simplified manner. Until next time!


What are Derivatives?
What is an OFS?


We all have heard about a company bringing an Offer for Sale (OFS), but don’t really understand the meaning of it, right? Let’s decode the same in today’s blog!
An OFS is a mechanism through which the promoters in listed companies offer their shares to others.
So, there is no fresh issue of shares in an OFS, rather it’s just an offer from promoters to sell their holding to others. Hence there is no increase in the share capital of the company and yes, as rightly guessed by you, the money paid by you against the shares purchased doesn’t go to the company, but goes to the selling promoters.
Now one question naturally arises in our minds being “Why do promoters sell their shares to others? Are they not confident about the shares of their own company?”
It’s not always like that!
There can be various reasons as to why promoters may be willing to sell their shares to others. Let’s see some of them:

1) To pursue other life goals:
Many a times it so happens that the promoters started a company from scratch and built it as a professional company, brought it to a certain stage - and it took them good amount of time to do so and at current stage of their personal lives, they wish to encash some money and pursue personal or professional goals.
2) Healthy profit booking on their part:
As they have built a business from scratch and have listed the company on the exchanges, doing good business and generating good cash flows, obviously they have made a decent return on their initial investments and what’s wrong with some profit booking? It doesn’t mean that they don’t believe in the fundamentals of their own company. Just assume yourself in their shoes. However strong stocks you may be holding in your portfolio, if you made a decent return, will you not want to secure some of the profits that have been made? Obviously yes!


3) Better investment opportunities:
It may also be a case where the promoters want some stake to be offloaded as they may be eyeing some better investment opportunities in some other space like say private equity, real estate etc.
So now we know as to why do promoters bring in an OFS and applying to an OFS is not always a bad proposition.

So that’s what an OFS is all about!

What is an OFS?
What is Grey Market Premium?

In an IPO flurry, we all have heard that this stock is having an 80% GMP, the other stock has a GMP of only 15% and the likes.

But what does GMP actually mean and is it even legal?

Let’s take an example – People apply for a blockbuster IPO and know for sure that it’s going to have a super listing - but many of the times they don’t get an allotment, especially in such rockstar IPO’s.

So, what do they do to enjoy the listing gains of such IPO’s?

Here comes the answer. They deal in the Grey Market.

A Grey Market, also known as a parallel market, is one where trading takes place outside the realm of official trading channels. Since this is an unofficial market, there are no rules and regulations. Market regulators like SEBI are not involved in these transactions and they don’t endorse this either.

Now, Grey Market Premium is nothing but the price at which the shares are being traded in the grey market. For instance, let’s assume the issue price for stock XYZ is Rs. 150 and the GMP is Rs. 100, it means that people are ready to buy the shares of company XYZ for Rs. 250, which implies that they expect the IPO listing price to be even above Rs. 250 and hence they will make a gain out of this transaction.

What is Grey Market Premium?
Equitas Small Finance Bank

Equitas Small Finance Bank is the largest SFB in India in terms of the number of banking outlets, and the second-largest SFB in India in terms of assets under management and total deposits in Fiscal 2019. They have a market share of 16% in terms of Assets Under Management in India. It is a subsidiary of Equitas Holding Limited (EHL).

IPO season continues with the 12th IPO post lockdown this year. IPO subscription starts from Oct 20, 2020, till Oct 22, 2020. The IPO price range is from Rs. 32 to Rs. 33 per share. The minimum market lot is 450 shares and in multiples thereof. At the upper price band, the subscription amount for 1 lot is Rs. 14,850. The shares are expected to list on Nov 2, 2020.


We already had a detailed discussion regarding the IPO in our video on YouTube. Here, are some additional points that we need to know about the bank.


SWOT Analysis of the bank:

Litigations against the bank:

Although no major litigation cases are pending against the bank, we found that RBI has taken action against the Bank on multiple occasions.

1) In 2016, Bank received final approval to carry out SFB business, subject to a condition to listing the bank within 3 years as per para 6 of the SFB Licensing Guidelines. In 2019, RBI found that the Bank violated the timeline so given in the above-mentioned para and imposed regulatory actions on the Bank with immediate effect. Accordingly, Bank was not permitted to open any new branches till further advice, and the remuneration of MD and CEO stood frozen at the existing level until the listing is done.

2) In 2018, Bank had violated the SFB Licensing Guidelines and provisions of the Banking Regulation Act by distributing mutual fund units, pension products, insurance products, and other such financial products/services on a non-risk sharing basis without taking prior approval of the RBI, as required under the SFB Licensing Guidelines. RBI levied a penalty of Rs. 1.00 million on our Bank for such omission.

Again in 2019, Bank increased its Authorized Capital without seeking exemption from RBI. The Rule - section 12(1)(i) of Banking Regulation Act - banking company can carry on business in India subject to the condition that the subscribed capital of the company is not less than one-half of its authorized capital, and the paid-up capital of the company is not less than one-half of its subscribed capital. On January 31, 2019, the bank increased the authorized share capital from Rs. 11,550 million to Rs.25,000 million by passing a resolution, when it had a paid-up capital of Rs. 10,059.4 million. So, the Bank violated the rules. RBI through its letter to the bank noted with serious concern that the Bank had neither noticed non-compliance with the provisions nor sought exemption from the RBI. RBI further advised the bank to be more careful in the future. Finally, on Nov 07, 2019, the bank reduced its authorized capital to 17,000 million to comply with the provisions.

The point here is, this highlights a weak compliance team of the bank. In the future, it might lead to the risk of unnecessary penalties due to non-compliance with RBI norms.
If you want to know whether I am applying to the IPO or not, check my Instagram Live at 12 noon on Oct 22, 2020.


Equitas Small Finance Bank


If you check the financial statements of UTI Asset Management Company of Q1 of FY 2021 compared to Q1 of FY 2020, below is the position of the change in revenue. 

In the above table, you may notice the revenue has increased by 11.63% for Q1 YoY. Total Revenue from Operations includes gains/ losses from fair value changes. Now, let’s understand the meaning of “Fair Value”

Meaning of Fair Value: Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as on date. In simple words, it can be substituted with the word, “current market price.” Fair Values are calculated according to IND AS 113. 

Now you might be wondering why are we discussing “Fair Value?”

Due to COVID-19, the equity and mutual fund markets were very volatile in Q1 of 2021 which resulted in a significant change in the fair values of such investment instruments. You might be aware of the “V shape recovery” which the market witnessed. Due to this, it’s probable that the company might have gained significantly on such investments. But since these gains are temporary but not permanent in nature, one should not consider these while analyzing the revenue from operations of the company for fundamental analysis and growth perspective along with the impact of the same on other parameters like PBT, PAT, etc. 

Let’s consider the following example. You have equity shares of Company A which you have purchased at Rs. 1000. The LTP as of 31st March is Rs. 1,800. As per Ind AS, you have to value it at the market value (LTP) in your balance sheet. So, for this, you will have to increase the asset value by Rs. 800. The 2nd impact of gain of this transaction will reflect in the profit or loss account. In IND AS terms, it’s not necessary that every such gain will reflect in profit or loss account only. Some assets are recorded through Other Comprehensive Income i.e. OCI Statement which is the second part of the statement of profit or loss which is placed after the Profit after tax element. So, a lot of such factors are determinable in such cases. 

Now let's assume a case that in the same company “Total Revenue from Operations” is Rs. 1,200 of which the gain due to “Fair Value changes” is Rs.800. In such a case, its “Revenue from core operations” will be Rs. 400 only. So, I hope you have understood that one should focus on “Revenue adjusted with Fair Value changes” rather than “Total Revenue from Operations.”


Coming back to UTI AMC, its Revenue after Fair Value changes is as follows:


After ignoring one item of gain due to fair value changes, the position of revenue differs significantly.


Based on the above, you must have understood the result of significant change in revenue pre and post consideration of the gain due to fair value changes in the case of UTI AMC on change in revenue from operations for Q1 of FY 2021 and FY 2020.

Note: We have not covered the technical perspectives like financial assets and relevant Ind AS which deals with this concept like IND AS 32, IND AS 109, and IND AS 113. The above blog writes up is only for the purpose of basic understanding about the gain or loss due to fair value changes. There are various other factors that can be considered and dependent ones, based on accounting policies and estimates followed by the companies.

 Parameters to analyze Top 3 Insurance Companies

In living life, everything that the person is worried about losing tries to ensure that by something. Insurance companies are the one who provides such risk management to individuals, businesses, and institutional clients. This is done through various types of insurance products that customers look for i.e. life insurance, health or medical insurance, car insurance, etc. The basic principle of all such products remains the same that the insurer guarantees payment or reimbursement in the event of losses for the insured. From an investor’s perspective, investing in certain kinds of insurance companies like life insurance may appear risky as these businesses consist of long-term products and services, and also require high initial acquisition cost. 

Therefore, while analyzing such companies’ certain business growth parameters need to be considered over the years and margins. We have covered in this blog such 3 parameters for the top 3 life insurance companies in India to take you through their short analysis to understand and compare these companies with each other. We have selected these top 3 companies based on the market capitalization as of 26th November 2020.

Embeded Value [EV]

This is the measure of the value of the life insurance company. This measure indicates the expected profitability from the current underwritten policies and current net worth. The embedded value of the company is calculated as the sum of adjusted net worth and the discounted value of profits from in-force policies.
Below is the comparison of the embedded value of the top 3 insurance companies:

New Business Premiums [NBP]

As the name indicates, this is the value of premium acquired by the entity from new policies for a particular year. So, the premium earned from the new contracts in a given financial year is referred to as the new business premium for an insurance company. Very natural to understand, if the company is able to grow at a higher rate with NBP, the business perspectives seem to be on the high good side.

Below is the comparison of NBP for the top 3 life insurance companies:


  • New Business Margin [NBM]  
    This is a measure of profit margin used by the insurance companies for the new business received during a particular financial year. NBM is the ratio of the value of the new business to the present value of premium income. It is calculated by dividing the profit on the new business by the present value of the new business or Embedded value.




Based on the above analysis, one can compare these parameters for the top 3 life insurance companies and understand the fundamental analysis of such companies. Rather, these are not the only parameters to be considered for investment decision making, so consideration of other factors along with these is important.



Parameters to analyze Top 3 Insurance Companies
Parameters to analyze IT Companies

Many investors keep a keen interest to invest in IT companies as they fall in the defensive category, meaning when all sectors are down, the IT sector is generally up. Also, since IT companies have global businesses, they are not only dependent on the domestic market i.e. India forms the view-point of diversification. 

So before investing in IT companies, let’s look at some of the important key ratios.

1. Operating Profit Margins (OPM). 

An Investor should focus at Operating Profit Margin of IT companies, because in the Service sector, especially IT companies, employee cost is the major cost. Below is the chart of the last 3 year’s OPM of Top 5 IT companies based on their market capitalization.

2. Return on Equity (ROE): 

ROE is a very important ratio to analyse for IT companies since it reflects the profit created for shareholders by reinvesting in its business. It is also said that it is profit on the shareholder’s capital on the balance sheet date. ROE should always be higher, otherwise investing in low ROE businesses will wipe out the investor’s wealth. Below is the chart of ROE generated over the last 10 years by these 5 major IT companies.

One of the key reasons to invest in IT companies: 

Since IT companies have global businesses, they get the advantage of depreciating Indian Rupee, which in turn increases profits and thereby enhancing their reserves (profits kept aside) year on year. IT companies distribute a good portion of earnings through a dividend to the shareholders. IT companies are also known as cash-rich businesses. They enhance shareholder’s wealth through buy-backs or dividends. Just look at the dividend payout ratio for the past 3 years of these Top 5 IT companies below.

Parameters to analyze IT Companies
Parameters to analyze Banks

Since the COVID-19 pandemic and global meltdown in stock markets, the whole Indian banking sector has underperformed due to fear of NPA. Even, RBI mandated banks to make COVID-19 related provisions in their books and instructed them to not declare any dividend till the end of September month. Before investing in banks, investors need to watch out for some of the key ratios, we have taken the top 5 banks as our examples based on market capitalization. Below are some of the important parameters to watch out for:

1. On the basis of Liquidity of Banks - Capital Adequacy Ratio:

Capital Adequacy Ratio (CAR) is simply the core capital of the bank. CAR is measured based on Tier-1 capital and Tier 2 capital. Tier 1 capital is such a capital where a bank can absorb the losses without disturbing normal business operations. Thus, it provides a liquidity cushion to the bank and it also protects the depositors. Tier 2 capital is such a capital where the bank can absorb the losses in the event of bankruptcy of a bank, it provides lesser protection to the depositors. Banks are required to maintain a minimum CAR of 10.5% including a Capital Conservation Buffer of 2.5% as per Basel III norms.

2. On the basis of Asset Quality:

Bank’s asset quality matter’s the most, higher the NPA ratio, the worst the case, NPA’s ultimately wipe out the capital of the bank, thus impacting the CAR ratio.NPA means the default of interest and the principal amount by the borrower. As per RBI, banks classify a borrower’s account as NPA when the interest due on the loan is not paid within 90 days. Investors need to analyze both Gross and Net NPA ratios Gross Non-Performing Assets as a % of Gross Advances (GNPA): GNPA is the sum of all the types of unpaid loans by the borrowers.
Net Non-Performing Assets as a % of Net Advances (NNPA): NNPA is the sum of unpaid loans less the provision made for these bad loans.

3. On the basis of Profitability:

One of the key profitability ratios to watch out for is Net interest Margin- NIM. Since the bank’s business model is to raise funds from depositors and lend it to individuals and businesses, it receives interest on an amount lent and pays interest on the funds raised via various routes. Thus, the difference between interest earned and interest expended over its average earning assets is called net interest earned, it is popularly expressed in % form and is popularly known as NIM.


Parameters to analyze Banks
Investing in Gold

Options for investment in gold:


  1. Physical Gold
    1. Jewelry
    2. Coins
    3. Gold Savings Schemes
  2. Paper Gold
    1. Sovereign Gold Bonds [SGBs]
    2. Gold Exchange Traded Funds [ETFs]
    3. Digital Gold [Mobile wallet platforms like Paytm, GoldRush, etc.]


Gold Market Cycle:

The gold market cycle means the period in which the instrument is in the bull run. Simply, it’s the period from the start point of the bull run to the correction start point. Usually, the gold market cycle lasts for around 8 to 10 years. 

For example – the previous gold market bull cycle was started in 2001 and ended in 2011. In 2001 – [In 2001 approx. per gram price was approx. Rs. 400 & in 2012 it was approx. Rs. 3,112. After this high, it corrected up to Rs. 2,227 in the next 3 years i.e. July 2015]. 

According to Experts, currently gold is in a bull market cycle. So, if one checks the below graph, approx. from 2017, the gold entered in the bull run cycle with approx. per gram price of Rs. 2,523 and as on date gold is at around Rs. 5,230. If the usual bull cycle horizon matches with the current gold market cycle, even if in the short term, gold is in an overbought zone, one can see a good amount of growth in the remaining life cycle. 

According to US-based analyst Nigam Arora, the author of The Arora Expert, “ there is more than 50% probability of gold approaching $3000 in this gold market cycle.” Earlier, Christopher Wood had said in his Greed and Fear report that gold could climb up to $4000 in the current bull cycle. [Current Price as at 6th August 2020 is approx. US$2,060.70, Mumbai – Rs. 5,768 per gram].

Returns comparison with other investment options:

If one compares the returns on major investment options for retail investors i.e. Fixed Deposit, SENSEX, NIFTY, Gold at last 20 years CAGR, Gold has provided the highest rate of return at approx.. 13% of CAGR.[Refer]

Investing in Gold