Why Sell Quality Stocks When You Can Simply Hedge?

Often wealth is eroded when market corrects. Investors panic and explore various options at the last moment. Karan Bhojwani along with Yogesh Supekar explain that a simple and consistent equity portoflio hedging strategy could be the panacea for mitigating risks in portfolio management during market downturns.

- Karan Bhojwani, Yogesh Supekar

Investing in the stock market is a risky affair. The ebb and flow in the market have even surprised the mavens and experts at regular intervals. However, many a time, we see investors helplessly watching the value of their stock portfolio melting away with every price downtick. During such a phase, the only solution they consider is to sell off their portfolio and sit entirely in cash. We are all aware that every year there are instances where markets witness a sharp drop and also every three to five years there is a big fall in the markets. But there is a way in which these phases of downturns in the stock markets can be tackled. Well, this is where hedging comes into play.

What is hedging?

Let us understand the concept with an example. Individuals opt for motor insurance as this motor insurance policy gives protection to the vehicle owner against damages to his/her vehicle. While in the stock market, there is no direct insurance policy available that protects you against the falling stock price, investors can deploy hedging strategy by using derivative instruments which will help them to protect themselves from any negative turn of event.

There are a number of strategies one can use to hedge one's portfolio, but here we will discuss some of the portfolio hedging strategies that are simple yet effective.

Protecting against risk using beta hedging with Nifty futures