Newsletter 64: Hedging Strategies: Protecting Investments

Ajay Learns to Protect His Portfolio

Ajay was sipping his evening chai, reviewing his investment portfolio. His stock and mutual fund investments had grown well, but recent market volatility had him worried.

“What if the market crashes tomorrow?” he thought.

His recent research on derivatives and futures had introduced him to the concept of hedging—a strategy used by professional investors to protect their portfolios from major losses. Ajay decided it was time to learn how to hedge his investments and reduce risk without compromising growth.

What is hedging?

Hedging is like insurance for your investments. Just as you buy insurance to protect against accidents, hedging helps safeguard your portfolio from unexpected market downturns.

It involves taking an opposite position in a related asset to minimize potential losses.

? If the market moves in your favor, your investments grow ??

? If the market crashes, your hedge cushions the loss ??

Techniques to Mitigate Investment Risks

Ajay discovered several effective hedging techniques:

1?? Using Put Options as a Safety Net

?? Put options give the right to sell a stock at a set price, limiting losses if the market falls.

? Example: If Ajay holds?5 lakh in NIFTY 50 stocks, he can buy a put option to protect against a market decline.

2?? Diversification Across Asset Classes

?? A mix of stocks, bonds, gold, and real estate reduces overall risk.

? Example: If stocks drop, bonds or gold may rise, balancing losses.

3?? Stop-Loss Orders for Automatic Risk Control

?? Setting a stop-loss ensures Ajay's stocks are sold automatically at a pre-set price before losses get too big.

? Example: If Ajay buys a stock at ?100, he sets a stop-loss at ?90 to limit downside risk.

4?? Investing in Defensive Sectors

?? Certain sectors (like healthcare, utilities, and FMCG) perform well even during downturns. ? Example: Ajay balances his portfolio with consumer staples that are less volatile.

Ajay Implements Hedging in His Investment Strategy

Ajay decided to take a balanced approach:

?? For his stock portfolio, he bought a NIFTY put option to hedge against market volatility.

?? For diversification: He allocated a portion of his investments into gold and bonds.

?? For risk control, he set stop-loss orders to manage stock exposure.

These steps ensured that even if the market turned bearish, his overall portfolio would remain stable and protected.

Key Takeaways for Investors Looking to Hedge Risks

?? Hedging is protection, not profit-making. The goal is to reduce risk, not speculate.

?? Options can be powerful tools, but they require knowledge and careful strategy.

?? A diversified portfolio is the best hedge. Don’t put all your money in one asset class.

?? Monitor and adjust hedges regularly – Market conditions change, and so should your strategy.

What’s Next?

Ajay had successfully learned to protect his portfolio. Now, he wanted to explore new, high-growth investment opportunities. In the next newsletter, he dives into the world of private equity and venture capital—learning how to invest in unlisted companies and promising startups.

Stay tuned!