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ALBM - An investment opportunity - Views on News from Equitymaster
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  • Jun 28, 2000

    ALBM - An investment opportunity

    Let's step away from 'stocks' for a moment to evaluate an investment instrument (which is related to stocks) that has a lower risk attached to it. We are referring to opportunities offered by the Automated Lending and Borrowing Mechanism (ALBM) at the NSE.

    You do not have to balk at the full form. ALBM is just fine. To make you more comfortable with the term, it is basically a more technologically advanced version of the 'badla' on the BSE. There are several factors that make investing in ALBM very lucrative.

    Suppose that you have Rs 100,000 to invest. At the same time you are wary of stock markets and are prepared to sacrifice those fantastic returns (for safety ofcourse) that were once offered TMT stocks. Nevertheless you want a return much higher than the measly 7-9% offered by fixed deposits. This is where ALBM comes in.

    In a secure environment where the clearing corporation guarantees every trade, investors can fund outstanding trades, either in cash or stock. In the first instance, investors can specify to their brokers which stock to fund (obviously which would be offering a higher return). For example, in last week's session, DSQ Software offered a mean return of 32.6% per annum (volumes exceeded Rs 1.3 bn). Among the other liquid stocks, which offered returns in excess of 25% were Aptech, Global Tele, HFCL, Infosys, M&M, Reliance, Silverline and Zee Tele. Thus an investor can take his pick regarding the stock he should invest in.

    But, as mentioned earlier, (hold your breath) these returns are just the average. If your broker passes on the exact return (he may not do so as it would lead to differential returns for different clients) at which the deal is struck, you could earn as high as 63% per annum (as in the case of Global Tele). Thus, you have to be aware of interest rates prevailing across the board to make the most of your money. Similar is the case in the stock lending facility.

    But there are several issues, which one must keep in mind. First, there is a brokerage, which is charged as a percent of the capital deployed in the market (and not as a percent of the interest earned). This charge, which varies from client to client, can limit the peak returns, which one expects to earn. Then there is an interest rate risk (the default risk is taken care of the by the clearing corporation). What this means is that while in a fixed deposit, your returns are fixed over the tenure of the deposit, in case of ALBM, the rate changes every one-week. Therefore, if the yields were to decline, the money would be reinvested only at lower rates, leading to lower annualised returns.

    All in all, the ALBM is a good investment opportunity for investors as it offers a better risk-return allocation than equity on one side, and fixed deposits on the other. So go right ahead and call up your broker to find out more about ALBM. Probably today's ALBM session (held every Wednesday) could be the next big money spinner for you!



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