MARKETS1 MIN READ

What should investors do when the markets turn bearish?

With the Sensex and Nifty shedding close to 4500 & 1400 points, roughly 12% of their value, in less than a couple of months, investors are left guessing if the markets would fall further or bottom out at these levels.

To add on to the investors woes, the Midcap & Small Cap index fared no better with each undergoing a drop of 25 to 30% of their values since the year’s inception.

While we would like to believe that the markets have bottomed out, has the economy really addressed the reasons for the fall? Including the widening fiscal deficit, rupee depreciation, rocketing fuel prices, significant defaults on AAA rated bond repayments by NBFC’s, FPI outflows and a looming 90,000 crore debt crisis by IL&FS, probably not.

The global economic setup is not favoring the bulls either, with Federal rate hikes, volatile crude oil prices and imposition of tariffs by the US.

The only hope for some respite from the falling markets could be dependent upon positive quarterly earnings, to be shortly released by the end of this month. A negative quarter may further see the markets head a down-ward spiral.

So how do investors protect their portfolios from taking a hit in this bearish market scenario?

In addition to the often heard ‘sit tight & do nothing, the markets will eventually recover’ wisdom, An investor can take active control of his portfolio by hedging his risk using derivatives namely options, that would limit an investors downside in a falling market.

A ‘put’ option works by letting the investor hedge his equity exposure in falling markets by being able to lock a price (strike price) at which the investor can sell back the security despite a fall in its price at some point in the future defined by the terms of the contract.

A smart investor follows good asset allocation, is patient, avoids unnecessary leverage and has a sound risk mitigation plan to limit downside on his portfolio.

While nobody can predict the markets a smart investor can rest assured by hedging his equity exposure and limiting his risk to the options premium paid during times of such market volatility.


Author

Vasudev Gupta


MD, Prosperity Wealth Management