Skip to main content

What Is Portfolio Insurance?

This is a method of hedging through which one protects his/her investments against market risk by short-selling index futures. This is used by those who understand how to trade in derivatives. Portfolio insurance is essential for investors having a high market exposure and are, hence, more vulnerable to market related risks. Hedging risk by investing in futures or, short selling, is a widely practiced norm, and is currently the best form of protection one can get against market crashes in India. A market crash can technically wipe out any investment, and insuring portfolio is the only guarantee one has so that the losses do not go beyond a certain level.

Why do you need it?

Assets like house, car, jewellery, etc can be insured through insurance products. However, those like shares and mutual fund investments have no insurance policies in India. When markets turn volatile and fall unexpectedly, like we recently witnessed, investors record major losses with nothing to protect them from the freefall. This is when hedging your market risk, or insuring your portfolio by investing in futures, becomes a key part of your investment strategy.

How does it work?

If you have invested in company stocks forming a major part of an index or in equity-based mutual fund schemes, and wish to hedge your market risks, all you have to do is invest in the futures of that index, or if it is just one big company you have invested in, you need to invest in the futures of that stock. For example, one  invested `5lakh in an equity mutual fund in December 2010. (S)He wanted to invest for six months, while the Nifty was at the 6,000. To insure his portfolio against risks, he invested `5,000 in Nifty 6000 PE trading at `100, (lot size of 50*100).

Currently, the Nifty is at 5,400. The markets have fallen by 10 per cent and so have his investments. Loss in investments equals `50,000. However the profit made from the Put option is 50*600 (6,0005,400) Rs 30,000. This reduces his overall loss to 20,000 (50,000-30,000). Hence, a small investment of `5,000 on an investment of `5lakh acted as portfolio insurance for Rahul, saving him `25,000 in losses.

Is there a downside?

 Portfolio insurance investments like futures work well when the markets go down. However, when they are up or remain at the same level, the futures investment eats into the profit or adds an additional loss to the investment. Though considering the amount spent on an investment and that on its protection, which need only be 1-5 per cent of the investment, it isn't all that bad, even if one were to lose that amount.

ASSETS LIKE shares and mutual fund investments have no insurance policies in India

 

 

-----------------------------------------------------------------

 

Also, know how to buy mutual funds online:

 

1) DSP BlackRock Mutual Funds:

http://prajnacapital.blogspot.com/2011/05/buying-dsp-blackrock-mutual-funds.html

 

2) Reliance Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-reliance-mutual-funds-online.html

 

3) Reliance Mutual Funds:

http://prajnacapital.blogspot.com/2011/07/buying-hdfc-mutual-funds-online.html

 

4) Sundaram Mutual Funds:

http://prajnacapital.blogspot.com/2011/07/buying-sundaram-mutual-funds-online.html

 

5) Birla Sunlife Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-birla-sunlife-mutual-funds.html

 

6) UTI Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-uti-mutual-funds-online.html

  

7) SBI Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-sbi-mutual-funds-online.html

 

8) Edelweiss Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-edelweiss-mutual-funds-online.html

 

9) IDFC Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-idfc-mutual-funds-online.html

 

 

Popular posts from this blog

Group Health Insurance

Buy Group Health Insurance Online   For Human Resources, the biggest challenge today is to decide whether medical benefits should be offered to employees or not, what type of plans should be offered, what will be the cost and how will the cost be split between employees and employer. Well, most of these are subjective and would depend on a lot of factors including company size, average employee salary, etc. However, this article will give you a fair idea on how you should go about deciding these factors: 1. Why offer group health insurance benefit to employees : Studies have proved that retention rates among employers offering GHI are much higher than the ones who are not offering. Moreover, the cost of providing this benefit as a percentage of salary is very low as compared to the perceived value. As an example, say if average salary of an employee in your organization is 4 LPA. If you decide to offer a health insurance benefit to him for a Sum insured of ...

ICICI Prudential Dynamic Plan Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   ICICI Prudential Dynamic Plan             Invest Online This fund does remarkably well during falling markets, but fails to show the same prowess during a rising market. The fund sticks to its mandate to adapt to the dynamic nature of the market by shuttling between debt and equity. It takes aggressive asset calls in equity when the market surges by investing in quality mid-cap stocks. At the same time, it adopts a defensive strategy by investing in debt and cash when markets get overvalued, making it a good long-term choice.     For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call     Leave a missed Call on 94 8300 8300   Leave your comment with mail ID and we will ...

SBI MAGNUM MIDCAP ONLINE

Invest SBI MAGNUM MIDCAP ONLINE   SBI MAGNUM MIDCAP fund didn't fare well in its initial years but, in recent years, has steadily improved its performance under the capable hands of its current fund manager. Although investing predominantly in mid-cap stocks, the average market capitalisation of its portfolio is lower than other category peers.   Although the stock selection approach is mostly bottom-up , the fund manager doesn't shy away from taking bold sector bets , as is reflected in its large exposure to the healthcare sector. She is equally adept at handling performance across market cycles--the fund has captured more of the upside during market upticks and contained the downside during downturns in a better manner than its peers.   Given its superior risk-reward equation, the fund is a worthy pick in its category.     ----------------------------------------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing EL...

Birla Sun Life MIP II Savings 5

  Birla Sun Life MIP II Savings 5 - Invest Online   Have you traditionally been a debt investor but now wish to test waters in equities? Then, debt-oriented funds such as Birla Sun Life MIP II Savings 5 (Birla Savings 5), which have limited exposure to equities, may fit your requirement. With a five year return of 10.5 per cent compounded annually, the fund managed a good 3-3.5 percentage points more than its benchmark Crisil MIP Blended Index, as well as its category average. The fund appears well poised to capitalise on a falling interest rate scenario and has increased the average portfolio duration of its debt instruments in recent times. Suitability Birla Savings 5 is suitable only for conservative investors. If you want to make a beginning in equities and cannot take any short-term declines in your stride, then this fund will suit you. If you are already an equity investor and want to use a debt-oriented fund merely as a diversifier, then you may prefer peers from the HDFC and Re...

Lump Sum or SIP?

Invest Mutual Fund Online     You have a lump sum in hand and you wish to invest in equity funds. However, you have heard a lot of talk about investing in equity funds through Systematic Investment Plans (SIPs) because they help average costs, ensure you do not ill-time the market, and help you invest in small sums, besides giving you many other advantages. So, should you invest the money you have in hand in one go, or let it remain in your bank account and then do an SIP? There is no harm in investing a lump sum amount. For all you know, compounding, over the long term, could work better with lump sum. However, make sure you fulfill all of these three criteria if you want to invest in one go. Else, SIP is the way to go. #1: You invest for the long term According to past data, ideally, if you have a time frame of 12 years or more, you can consider lump sum investing (provided you satisfy the other two conditions that follow). So, what is the sanctity behind 12 years? Is it because only...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now