Meet artificial intelligence, your new financial advisor. In this article, Octa Broker analyst shows how AI can help investors save time when analysing the Indian stock market and enable them to make quick but well-informed decisions. The article includes a simple example of how to approach AI and ask it for advice.
One of the disruptive technologies that may change the landscape of financial markets in the coming years is artificial intelligence (AI). Today, we already see brokerage companies and investors starting to use AI to make investment decisions. One of the key products expanding the horizons of opportunity for Indian investors is ChatGPT. OpenAI introduced ChatGPT in November 2022. It was a revamped user interface based on the GPT-3.5 language model, with dialogue capabilities and improved comprehension and text generation. The model was subsequently updated, and GPT-4 was released in March 2023, offering greater accuracy, creativity, and contextual understanding. OpenAI has been developing a series of generative retrained transformer (GPT) models since GPT-1, released in 2018, gradually improving the architecture and capabilities of each generation. ChatGPT set a record for user adoption. It took it less than two months to get its first 100 million users.
Investors’ use cases for AI
The GPT model is trained on huge amounts of textual data. For example, for solving investment cases, this data includes various sources of financial market knowledge: research, textbooks, internet resources, and much more. Obviously, no investor is able to study all of them on his or her own in a lifetime. Therefore, ChatGPT can help investors in India with the following topical issues:
- Personal finance. AI can help analyse one’s own budget, create one, and provide savings recommendations.
- Trading in the financial market. AI can develop a trading strategy, test it on historical data, write code, and provide detailed instructions on how to run the strategy.
- Forecasting financial markets. AI has been trained on a vast data set, so it has all the mathematical tools to make forecasting models for any financial asset, be it gold, Bitcoin, or the most popular stocks in the Nifty 50 Index.
- Learning to invest. AI can not only prepare detailed materials on a topic of interest but also use everyday comparisons to explain complex terms, such as derivatives or hedging.
Let’s see how the AI deals with building an investment portfolio of stocks in the Nifty 50 index. Kar Yong Ang, a financial market analyst at Octa Broker, prepared the prompt for ChatGPT:
‘You are a financial analyst. Your job is to help me put together an investment portfolio for passive income.
Keep the following things in mind:
- My risk profile is moderate.
- The amount I am willing to allocate to the portfolio is Rs. 100,000.
- Monthly investment amount – Rs. 10,000.
- Desired return – 18% p.a.
- The market in which I want to invest in is the Indian equity market.
Please map out a portfolio according to this data and detail which assets of which companies I can buy according to this data. Describe which sectors of the economy they represent.
Make a summary table with all the assets. The table should include the following columns: Company name, Economic sector, Portfolio %, Amount in rupees to invest.
Give a brief characteristic of each company you propose and explain why (how it is favorable in terms of investments compared to others).
Analyse by the following indicators:
- Market and Competitor Analysis: The company’s position in the market; Macroeconomic factors and how they may affect the company in the near future; Market share.
- Financial Indicators for 2024: Revenue; Net income; Earnings per share; Marginality.
- Profitability indicators: Return on equity; Return on assets.
- Indicators of Financial Stability: Debt to equity; Interest coverage.
- Dividend Policy: Dividend yield; Dividend payout ratio.
- Characterise each metric briefly: what it shows and why it is important to an investor’.
ChatGPT provided the following response:
‘To construct an Indian equity market portfolio for passive income, I’ll follow a balanced approach, selecting a mix of blue-chip and growth stocks, with some exposure to defensive sectors. Here’s a proposed portfolio, focusing on moderate risk and a target return of 10% per annum.
Portfolio Breakdown
Company Analysis
- HDFC Bank
- Sector: Financials
- Position: Leading private sector bank with a large market share in retail banking.
- Macroeconomic Impact: Interest rates and inflation can influence its lending and deposit margins. The growing Indian middle class and increasing digital banking adoption present growth opportunities.
- 2024 Financials: Strong revenue growth and high net income driven by efficient cost management.
- Revenue: Rs. 160,000 Cr.
- Net Income: Rs. 36,000 Cr.
- EPS: Rs. 72
- ROE: 17%, ROA: 2%, D/E: 0.8
- Dividend Yield: 1.2%, Payout Ratio: 15%
- Why HDFC: Solid fundamentals, high profitability, low debt, and steady dividends make it a core holding for stability and income.
- Tata Consultancy Services (TCS)
- Sector: Information Technology
- Position: India’s largest IT services company, a global leader in digital transformation and consulting.
- Macroeconomic Impact: Growing demand for IT services in digital transformation, AI, and cloud computing. Global economic trends impact exports.
- 2024 Financials: Strong profitability, high margins due to a strong export market.
- Revenue: Rs. 190,000 Cr.
- Net Income: Rs. 40,000 Cr.
- EPS: Rs. 103
- ROE: 30%, ROA: 16%, D/E: 0.1
- Dividend Yield: 1.5%, Payout Ratio: 40%
- Why TCS: A strong global presence with high ROE and reliable dividends, benefiting from the digital shift across industries.
- Reliance Industries
- Sector: Energy, Telecom, Retail
- Position: Diversified conglomerate with dominant positions in energy, telecom (Jio), and retail.
- Macroeconomic Impact: Oil prices and consumer spending influence its energy and retail divisions. Jio’s digital business is poised to benefit from India’s mobile internet growth.
- 2024 Financials: High revenue growth across segments.
- Revenue: Rs. 780,000 Cr.
- Net Income: Rs. 65,000 Cr.
- EPS: Rs. 95
- ROE: 12%, ROA: 4%, D/E: 0.6
- Dividend Yield: 0.4%, Payout Ratio: 10%
- Why Reliance: Strong diversification, significant market share in fast-growing sectors like telecom and retail, promising long-term returns.
- Hindustan Unilever
- Sector: Consumer Staples
- Position: Market leader in FMCG products, focusing on essential goods.
- Macroeconomic Impact: Consumer spending growth in India’s rising middle class.
- 2024 Financials: Stable cash flows and high margins.
- Revenue: Rs. 60,000 Cr.
- Net Income: Rs. 10,000 Cr.
- EPS: Rs. 20
- ROE: 80%, ROA: 18%, D/E: 0.1
- Dividend Yield: 1.8%, Payout Ratio: 75%
- Why Hindustan Unilever: Defensive stock with reliable dividends and low volatility. It’s a staple of most passive income portfolios.
- Infosys
- Sector: Information Technology
- Position: Second-largest IT services provider after TCS, a leader in digital services.
- Macroeconomic Impact: Global demand for IT services and cost efficiency measures.
- 2024 Financials: High profitability and significant cash flow.
- Revenue: Rs. 150,000 Cr.
- Net Income: Rs. 32,000 Cr.
- EPS: Rs. 76
- ROE: 28%, ROA: 12%, D/E: 0.1
- Dividend Yield: 2%, Payout Ratio: 45%
- Why Infosys: Solid ROE, low debt, and attractive dividend yield make it a favorable IT stock with stable long-term growth potential.
- Bajaj Finance
- Sector: Financials
- Position: Leading non-banking financial company (NBFC) in India, specializing in retail financing and consumer loans.
- Macroeconomic Impact: Rising consumer spending and credit growth in India.
- 2024 Financials: High growth in revenue and profit due to expanding retail finance.
- Revenue: Rs. 50,000 Cr.
- Net Income: Rs. 10,000 Cr.
- EPS: Rs. 200
- ROE: 20%, ROA: 3%, D/E: 1.2
- Dividend Yield: 0.5%, Payout Ratio: 20%
- Why Bajaj Finance: High-growth financial stock with a strong position in consumer lending, offering potential capital appreciation.
Key Financial Metrics
- Return on Equity (ROE): Measures how efficiently a company uses shareholders’ equity to generate profits. Higher ROE indicates more efficient use of capital.
- Return on Assets (ROA): Indicates how well a company uses its assets to generate earnings. A higher ROA suggests better asset utilization.
- Debt to Equity (D/E): Shows a company’s financial leverage. A lower ratio indicates less reliance on debt.
- Interest Coverage: Measures a company’s ability to pay interest on its outstanding debt. Higher values indicate better debt management.
- Dividend Yield: The percentage of dividends paid relative to the stock price, important for income-seeking investors.
- Dividend Payout Ratio: The proportion of earnings paid out as dividends. A balanced ratio ensures sustainability while offering returns to investors.
This portfolio is structured to achieve a balance between stability (through HDFC Bank, Hindustan Unilever) and growth (via Infosys, Bajaj Finance). The allocation across IT, finance, and consumer staples sectors diversifies risk while targeting a 10% annual return (you can see the developed prompt here)’.
As you can see, in just a few minutes, we can analyse any financial instrument, perform a comparative analysis, and save time. However, according to Kar Yong Ang, “ChatGPT still lacks the most important skills—risk management and error checking. Investors in India need to improve their competencies constantly and double-check the results generated by AI to make the right investment decisions”.
Octa is an international broker that has been providing online trading services worldwide since 2011. It offers commission-free access to financial markets and various services, already utilised by clients from 180 countries with more than 42 million trading accounts. The company’s free educational webinars, articles, and analytical tools help clients reach their investment goals.
The company is involved in a comprehensive network of charitable and humanitarian initiatives, including the improvement of educational infrastructure and short-notice relief projects supporting local communities.
Octa has also won more than 70 awards since its foundation, including the ‘Best Educational Broker 2023’ award from Global Forex Awards and the ‘Best Global Broker Asia 2022’ award from International Business Magazine.
