Hedging

Investments

Hedging is taking an offsetting position to reduce the risk of an existing investment. Like buying insurance against investment losses. Common hedges for Indian retail investors: gold against equity falls, liquid funds against emergency needs, debt allocation against equity volatility.

In detail

Practical hedging for Indian retail investors:n1. Gold as hedge: gold typically rises when equity falls (negative correlation). 10% gold allocation reduces portfolio drawdownn2. Debt allocation: as you near a goal, shift from equity to debt to protect accumulated corpusn3. Systematic withdrawal: SWP rather than lump redemption reduces timing riskn4. Currency hedge in international funds: some international funds offer hedged variants (USD/INR hedged) to eliminate currency risknnNote: perfect hedging eliminates all returns too. The goal is optimal, not maximum, hedging.

Formula

Hedge ratio = Value of hedge / Value of portfolionFor 10% gold hedge on Rs 10L portfolio: Rs 1L in gold ETF/SGB

Real-life example

🇮🇳 India example

Priya has Rs 20L equity portfolio. She is concerned about market volatility near her retirement. She shifts Rs 4L (20%) to debt funds -- partial hedge. If equity falls 30%, her portfolio falls only 24% instead of 30%. The debt portion cushions the blow.

Frequently asked questions

Is buying gold a good hedge against stock market crashes? ▼

Historically yes in most Indian market downturns. 2008: Nifty -60%, gold +30%. 2020 COVID: Nifty -38% (recovered quickly), gold +28%. 10% gold allocation in an equity portfolio has historically reduced drawdowns without significantly reducing long-term returns.