When the market crashes, it can have a significant impact on your wealth. However, there are strategies you can adopt to mitigate this risk. Even big mutual fund houses employ one such strategy by securing their portfolio through the purchase of equivalent value of yearly Nifty puts. This approach is similar to buying an insurance policy for your portfolio.
The advantage of buying Nifty puts is that when the market crashes, your mutual fund investments will also decrease in value. However, the yearly put option that you have purchased will appreciate in value, helping to offset your losses. At this point, you can choose to sell the put option and reinvest the proceeds in mutual funds.
By doing so, when the market eventually recovers, your portfolio will appreciate even more because you have bought additional mutual fund units at the bottom. This can significantly boost your overall returns.
If you are unsure about how and where to invest, it is always a good idea to seek advice from a veteran in the field. They can help you secure your financial goals in the most prudent manner. Feel free to contact us via Whatsapp at 9482590290 for assistance.
Pl guide how to do it
Dear Arvind,
I will explain the methodology
– In this strategy if you already have a portfolio you need to find Beta of your portfolio.
– Once you multiply beta with your portfolio value you know the amount you need to hedge
– For the above derived value of amount, you can hedge by buying yearly puts equivalent to that amount (the cost of puts is approx 5% of your portfolio value) hence we term it as buying insurance policy.
– For an example your portfolio is of Rs1000, and you bought the yearly puts for Rs 50 for hedging. Incase of market crash your porfolio goes down to Rs 750, but your nifty put option will be in Rs 250 profit, you encase it and at the market crash time your portfolio is back to Rs1000.
– As and when the market recovers back by 25% your portfolio will not be back at Rs 1000, but it will be at 1250 and appreciation of 25%! if you take out the cost of insurance i.e 5% you net appreciation will be 20%.
– How ever we need to remember once, market is in its growth phase the portfolio will grow at slightly lesser pace. For an example if the market grew at 15% your portfolio will become Rs1150/- BUT you have to deduct cost of put for hedging i.e you portfolio appreciation will be 10% (15%-5%)
So all in all when the market is doing well you are doing well but when the market falls the greater the fall the better will be your recovery. When market falls everyone will be in panic but you will be at peace.
– I understand it appears simplistic one needs to have a professional prudence to decide when to encash your put. This strategy is employed by most of the MF managers to hedge their portfolio.
– In case if you are interested to invest in this strategy managed by SEBI registered advisory group you may send me DM.
regards