Article

How to Secure your Portfolio Against Fall in Nifty?

12 Jun 2019

The Nifty chart over the last 18 years shows a secular up move in the index. However, within the overall trend, there have been bouts of severe volatility and sharp corrections. We have seen big corrections in the market in 2000, 2008 and 2013. The corrections have ranged from 20% in 2013 to as high as 62% in 2008. As an investor, it is not always possible to enter at the bottom and exit at the top because markets tend to be counter-intuitive. How do you adopt a systematic approach to securing your portfolio against a fall in the Nifty? There are some proactive solutions and some reactive ones.

Chart Source: Google Finance

It would be very simple to say that over the long run the Nifty has made profits. The bigger question is how to shield against short term volatility.

1. Time to reallocate – Buy into strength and sell into weakness

This is a cardinal approach to handling a correction. Even when the NBFC crisis broke out in late 2018, Dewan Housing corrected more than LIC Housing or Bajaj Finance. That is why, it is always essential to buy into strength and sell into weakness in a falling market because weak stocks become vulnerable. When you reallocate your portfolio, it has a cost but it would be smarter than just watching your portfolio depreciate. Quite often, investors use discrete options like averaging or exiting altogether. There is a mid-way approach.

Why are we talking about buying into strength? When the Nifty corrects, it separates the men from the boys. In 2000, technology stocks caused the crash. Over the last 18 years stocks like Satyam, Pentamedia, DSQ and many more vanished. But stocks like Infosys, TCS and Wipro have only emerged stronger. The rule is to exit frothy stocks immediately.

2. Seriously consider farming your losses for tax purposes

In India, tax farming is quite popular among HNI investors. If you are holding on to stocks and it is down in the last 6 months, you can book a loss and write it off against other gains. This reduces your capital gains tax liability. Now that LTCG is also taxed on equity, this can be applied to LTCG and to STCG. By farming losses, you don’t lose anything but the notional loss is converted into a real loss and reduces your overall tax liability. Even if you don’t have gains in this year, you can still farm these losses and carry forward for a period of 8 years.

3. Make the best use of hedging tools

The stock market offers you a variety of hedging tools. You can sell futures against your stock to lock in profits and keep rolling over. Alternatively, you can buy lower put options to limit you risk in a falling market; either in the stock or the index. You can even sell higher call options to reduce your cost of holding. In short, F&O offers you a plethora of opportunities to protect and also benefit from a falling Nifty.

4. A phased approach will be a good shield against a falling Nifty

The best of traders are not able to call tops and bottoms of the market consistently. When the market is falling, you normally believe that you have a choice between staying out and catching a falling knife. But there is a third option. You can adopt a phased and systematic approach to investing, at least till the time the volatility normalizes. Focus on managing your risk. One of the basic rules you must follow is to be true to your long term goals. They don’t need to be impacted by Nifty volatility and SIPs tagged to these goals must go on.

5. Keep liquidity handy to buy stocks at lower levels

A sharp correction in the Nifty can also offer bargains. But the trick is to ensure that you have liquidity in your hand when it matters. So, it is time to selectively roll your shopping trolleys out. You were happy to purchase HUVR at 1900 then why not at Rs.1500? A lot of quality stocks also correct in sympathy. Look for bargains and buy quality at cheap prices.

A falling Nifty calls for a mix of proactive and reactive actions to protect the value of your portfolio and make the best of opportunities. It is not too complicated!

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How to Secure your Portfolio Against Fall in Nifty?

12 Jun 2019

The Nifty chart over the last 18 years shows a secular up move in the index. However, within the overall trend, there have been bouts of severe volatility and sharp corrections. We have seen big corrections in the market in 2000, 2008 and 2013. The corrections have ranged from 20% in 2013 to as high as 62% in 2008. As an investor, it is not always possible to enter at the bottom and exit at the top because markets tend to be counter-intuitive. How do you adopt a systematic approach to securing your portfolio against a fall in the Nifty? There are some proactive solutions and some reactive ones.

Chart Source: Google Finance

It would be very simple to say that over the long run the Nifty has made profits. The bigger question is how to shield against short term volatility.

1. Time to reallocate – Buy into strength and sell into weakness

This is a cardinal approach to handling a correction. Even when the NBFC crisis broke out in late 2018, Dewan Housing corrected more than LIC Housing or Bajaj Finance. That is why, it is always essential to buy into strength and sell into weakness in a falling market because weak stocks become vulnerable. When you reallocate your portfolio, it has a cost but it would be smarter than just watching your portfolio depreciate. Quite often, investors use discrete options like averaging or exiting altogether. There is a mid-way approach.

Why are we talking about buying into strength? When the Nifty corrects, it separates the men from the boys. In 2000, technology stocks caused the crash. Over the last 18 years stocks like Satyam, Pentamedia, DSQ and many more vanished. But stocks like Infosys, TCS and Wipro have only emerged stronger. The rule is to exit frothy stocks immediately.

2. Seriously consider farming your losses for tax purposes

In India, tax farming is quite popular among HNI investors. If you are holding on to stocks and it is down in the last 6 months, you can book a loss and write it off against other gains. This reduces your capital gains tax liability. Now that LTCG is also taxed on equity, this can be applied to LTCG and to STCG. By farming losses, you don’t lose anything but the notional loss is converted into a real loss and reduces your overall tax liability. Even if you don’t have gains in this year, you can still farm these losses and carry forward for a period of 8 years.

3. Make the best use of hedging tools

The stock market offers you a variety of hedging tools. You can sell futures against your stock to lock in profits and keep rolling over. Alternatively, you can buy lower put options to limit you risk in a falling market; either in the stock or the index. You can even sell higher call options to reduce your cost of holding. In short, F&O offers you a plethora of opportunities to protect and also benefit from a falling Nifty.

4. A phased approach will be a good shield against a falling Nifty

The best of traders are not able to call tops and bottoms of the market consistently. When the market is falling, you normally believe that you have a choice between staying out and catching a falling knife. But there is a third option. You can adopt a phased and systematic approach to investing, at least till the time the volatility normalizes. Focus on managing your risk. One of the basic rules you must follow is to be true to your long term goals. They don’t need to be impacted by Nifty volatility and SIPs tagged to these goals must go on.

5. Keep liquidity handy to buy stocks at lower levels

A sharp correction in the Nifty can also offer bargains. But the trick is to ensure that you have liquidity in your hand when it matters. So, it is time to selectively roll your shopping trolleys out. You were happy to purchase HUVR at 1900 then why not at Rs.1500? A lot of quality stocks also correct in sympathy. Look for bargains and buy quality at cheap prices.

A falling Nifty calls for a mix of proactive and reactive actions to protect the value of your portfolio and make the best of opportunities. It is not too complicated!