What is margin funding? If I take a loan to invest in public offers, will it be called margin funding? Is it a good idea to invest through it?
Margin funding is a mechanism whereby a trader can buy stocks by paying only a part of the total purchase cost, which is treated as margin. The rest of the money is paid by the funding entity, which could be a non-banking financial company and charges an interest on the portion of the purchase value it funds.This facility is very prevalent during initial public offerings and follow-on public offers, when high net-worth individuals (HNIs) resort to this facility to get a higher allotment, and thus, a greater possible profit if the issue lists at a premium.
However, the trader takes the entire price risk of the purchase, which along with interest, could also lead to possible losses if the listing happens at a nominal premium or discount to the offer price. Margin funding can also be seen in secondary markets where brokers allow clients to take positions in stocks through margin funding. Whether you should resort to margin funding depends on your risk profile and market sophistication. If you are a seasoned trader, you could opt for it after considering the risks. However, if you are an investor, you would be better-off investing your own funds with a long-term view on the markets and not resort to such leveraged trading.
Which sectors have been impacted by the correction in the stock markets over the past few days? Should one book profits in these sectors? Which ones are a good bet now?
We have seen stocks fall across the board, with sectors such as banking, telecom, sugar, cement, realty and packaging, leading the correction. If you are a long-term investor, you should book profits upon realisation of your investment and price goals, rather than make knee-jerk reactions to markets corrections, as markets could see-saw and confuse you in the short run. Instead of getting carried away by sentiments, one should look at value buys across sectors, which have the potential of delivering decent returns over the long term and invest in such stocks.
I have a surplus of Rs 1 lakh. Should I invest these in gilt funds? Are these an attractive investment option in the current market? My investment horizon is one year, after which I shall need the money.
Gilt funds are debt-oriented mutual fund schemes, which invest their corpus in government securities. These papers have minimal default risk, since these are issued by the government. However, these do carry a volatility risk to an extent, due to changes in interest rates. If interest rates rise, the price of gilts fall and vice-versa. Since you have a one-year horizon, you may want to reduce your volatility risk by investing in a short-term gilt fund, as opposed to a long-term one, albeit with marginally lower possible returns.
The writer is director, Touchstone Wealth. Send your queries to yourmoney@bsmail.in