Risk Management

Risk Management


Risk Management is different in trading and investment.

The main purpose of investment is to hold shares for long term.

However, Active investors should have some strategy to protect portfolio from any fall.

It can be done by various ways

1. HEDGING  is done by  Future and Options

2. Shifting portfolio to low beta stocks.

   3. Booking some profit and parking funds in Liquid funds

Hedging :

            Hedging means buying Opposite position.

                        E.g. If you have portfolio of 10 Lacs and you suspect market may fall more than 5% in coming few days, you can sell 1 lot of Nifty future to protect portfolio.

            Another way of Partial Hedging is to Sell ATM Call or buying a PUT. You get 2-3% protection immediately. Its good enough if you repeat 3-4 times a year.

Do not venture into Futures and Options without fully understanding the concepts.


1. Risk management has to be done when Market correction is anticipated.

            E.g. if nifty goes above 30 PE, it’s time to protect portfolio.

            If there is some bad news of economy, then protect portfolio.

            Best clue is Global markets.

            If entire world is RED then our market may also goes down..

2. If correction is slow then Sell Nifty future or anticipated fast fall, buy put option

Hedging is done on portfolio

3. Passive investors. DO NOTHING for sudden risks

4. Liquid funds can be used for risk management

            If  A and B are two investors having 10 crore portfolio.

            A sells shares of 5 crores and buy liquid funds.

            B doesn’t do anything.

            If market corrects 20 % then portfolio value of A will be 9 Lacs.

            Portfolio value of B will be 8 lacs..

5. If sharp correction then Buy put option

            If slow correction then sell call option

            Sell future is versatile

6. Risk is an inherent part of investing. You do not get something for nothing after all. But with a little planning and careful consideration, you can significantly reduce your risk and increase your earnings in the market. 7. Transfer the portfolio from high beta stocks to low beta stocks, the fall of the portfolio will be less.