Just lately, I heard an individual speaking about Nifty Futures Contract in a YouTube video. He stated this, and I quote: “I do know many individuals who since lot of time has bought Nifty Futures and hold it rolling over. They are saying, brother inform me this, at 10% margin you’re 100% publicity. Nifty is a compounding asset, yearly it grows at a charge of 12%. So, I’ve invested 10%, 12% development I’m getting over whole contract worth. What’s improper with it? So relying upon what you’re understanding is in the direction of the market, what’s your outlook is in the direction of the market, all merchandise are good…“
Sounds tempting, proper? A YouTube guru pitching you a technique to amplify your Nifty returns with minimal funding (use of margins)? Leverage the facility of futures, they are saying. Journey the Nifty’s upward wave with only a fraction of the capital. However is it actually that straightforward?
Issues are hardly ever as simple as they appear in these movies, proper?
Watching this video, it was clear that the individual was pitching in favour of Futures buying and selling. However because the individual was quoting too many jargons like rolling over, 10% margins, compounding asset, 12% development over whole contract worth and many others, I assumed let’s declutter it. The very first thing I did was, I attempted to convert what he was saying into an excel desk (pure arithmetic).
The aim was to really quantify if the returns are actually as unbelievable because the expressions within the video.
So, let me present you all of the excel calculations right away, after which I’ll clarify what the individual was saying and the way this excel desk can clarify that.
Decoding the “10% Margin, 12% Development” Declare
Let’s break down what this individual within the video is definitely suggesting.
At its core, he’s speaking about Nifty Futures. Think about betting on the place the Nifty 50 index shall be sooner or later. You’re getting into right into a contract to purchase (or promote) the index at a particular worth on a particular date.
Now, right here’s the place the “10% margin” is available in. In contrast to shopping for shares the place you pay the total quantity upfront, with futures, you solely must deposit a fraction of the whole contract worth as margin. That is leverage – a double-edged sword. It means that you can management a bigger place with much less capital, probably magnifying your returns.
However what concerning the expiry date? Futures contracts don’t final ceaselessly. They’ve a set expiry, normally the final Thursday of the month. So, what occurs if you wish to maintain onto your place for longer? That’s the place “rolling over” is available in. It’s like extending the expiry date in your wager by closing out your present contract and opening a brand new one for the subsequent month. However keep in mind, this rollover comes with a value, which we’ll focus on later.
The video highlights the inherent threat in such type of contracts. The individual within the video focuses on the upside, however what occurs when Nifty doesn’t cooperate?
The Satan’s within the Particulars: A Actuality Test
For example the fact of this technique, let’s contemplate a hypothetical instance. I’ve made an excel desk for an instance Nifty Futures Transaction. Our dealer buys 10 contracts (50 items every) at Nifty worth of twenty-two,000 with Far-Month Validity. His beginning month was Jan’2023. He stored rolling over his Future contracts for 8 instances (2 Years). For the primary 7 instances, each time his maturity got here close to, he discovered that Nifty was down by 0.1% from his bought worth, so he manually exited reserving a loss. The eight time, Nifty surged and he made a revenue. Within the calculation I’ve additionally thought-about a buying and selling price of 0.2% for each transaction.
Let’s say a pal, let’s name him Rohan, tried this technique. Rohan purchased into the hype and determined to roll over his Nifty futures contract, pondering nifty would at all times go up. For seven out of eight quarters, he needed to exit with small losses because the expiry date approached.
Right here’s the excel I ready for this situation (see above).
As you’ll be able to see, Rohan confronted buying and selling prices of 0.2% for each transaction, and he needed to roll over seven out of eight instances. You possibly can see within the excel desk the amount of cash he needed to endure.
ROI vs. XIRR: Unmasking the True Return
Now, let’s discuss measuring Rohan’s returns. A easy Return on Funding (ROI) calculation would possibly paint a rosy image. In Rohan’s case, the ROI is calculated as web revenue divided by the whole funding, which comes out to be 19.82%. Seems to be spectacular, proper?
However right here’s the catch: ROI doesn’t contemplate the time worth of cash. Would you quite get ₹1000 immediately or in a yr? Clearly, immediately! Cash obtained sooner may be reinvested and earn additional returns.
That’s the place XIRR (Prolonged Inner Price of Return) is available in. It’s a extra correct option to measure returns, particularly when you will have irregular money flows over totally different time durations.
After we calculate the XIRR for Rohan’s buying and selling exercise contemplating the timing of every funding and return the XIRR comes out to be 10.08%. Whereas the easy ROI calculation would possibly look spectacular, the XIRR paints a extra practical image. It reveals that the precise return, contemplating the effort and time concerned, is considerably decrease.
My Perspective: Is It Price It?
So, right here’s my take.
In a market the place Nifty has traditionally delivered round 12% yearly, is the added threat and complexity of futures buying and selling, with all its rollovers and margin calls, actually price it for a ten% XIRR? Bear in mind, Rohan spent a considerable quantity of his money and time on this.
For me, personally, the juice isn’t well worth the squeeze. I’d quite spend money on a diversified portfolio of shares or ETFs and sleep peacefully at evening. As they are saying, there isn’t any free lunch in inventory market.
Conclusion
Futures buying and selling just isn’t a assured path to riches. Whereas leverage can amplify good points, it may possibly additionally amplify losses. Don’t be swayed by flashy movies promising straightforward cash.
Earlier than diving into the world of futures buying and selling, do your personal analysis and perceive the dangers. If you’re a newbie, I’ll counsel, begin with long run investing in shares, ETFs, and REITs. I feel, after that you’ll not flip in the direction of Derivatives (Futures & Choices). Have you ever ever heard Warren Buffett or folks like him boasting about Future Contracts in an interview? Not that they have no idea about it, however what they know higher is shares.
What are your experiences with futures buying and selling? Share your ideas within the feedback beneath.
