“Is there something like hedging investment portfolio of MFs?” A client sent this message this morning. My mind was thinking.
Why would she ask that? Someone else has done it and told her? She has read about it somewhere and is curious? Is she scared about the current market scenario and how it will unfold in days to come?
Well, for all I know, it could be all of the above.
For the past year or so, markets have been very volatile, so much so, that the investor is feeling edgy. She can’t take any more of the red.
On the other hand is the investor, who has some gains in the portfolio. But the volatility rattles her. She wants to protect whatever gains the portfolio has.
Both the investors unknowingly are following Warren Buffets’ famous dictum – “Never lose money.”
Coming back to my client’s dilemma about hedging the portfolio. Hedging is much like buying insurance. In this case, if the markets benchmarks go down significantly, the hedge protects the portfolio value.
How do you hedge? You can simply go cash, diversify or buy futures / options. My client was more likely referring to futures/options.
Hedging comes at a cost including the premium you pay for buying the put option or a future contract. Then there is brokerage and taxes. You may have to keep rolling over your hedge with additional costs.
Should you hedge the investment portfolio?
No, if you are adequately diversified across asset classes. The volatility affects only one portion of the portfolio.
Yes, if only have stocks / equity mutual funds in your portfolio and can’t take the volatility.
Yes, if you want to use your money soon for another purpose. Ideally, in that scenario, you should not be in equities at all.
No, if you have a long term horizon.
No, if you are don’t want to forego a part of your returns due to costs of hedge and resulting taxes.
Yes, if peace of mind is the only thing that matters to you. But then why be in equity?
“Your portfolio is well diversified, positioned for the long term and invested through conservatively managed funds. Hedging may protect you from short term volatility but the costs can impact your returns.” I sent my response along with this post.
Do you hedge your investment portfolio? What is your approach? Do share your thoughts in the comments space.