“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.
Sir. I often compare prospective funds using the facility on
fundo and rupeevest.
Without fail, the two websites rate each fund quite differently.
For eg, Axis Bluechip and Rel Large cap are rated 5 star on one but 4 and 3star on other. The second site rates HDFC Top 100 and ICICIBluechip as 5 star , while the first site does not
Kindly suggest reasons for this and more importantly how to use this information
Every rating process has different parameters and weightage which can change the way the stars appear. in most cases, the past performance drives the rating. You can’t make investment decisions only on the basis of ratings. At best, they can become filters for you to shortlist some funds to study in further detail.
I am not a fan of these ratings.
Hi thanks
But I guess there has to be some guide for retail investors and hence some use of these ratings, though do agree its based on past and Not forward looking.
Do you think, we could connect separately and you could give me some explanation to use the rating system of fundo and repeevest
I am sure you have understood their logic n system
Will be a big help