Sector Performance Analysis
There are some sectors that have continuously done better on Budget Day. Most of the time, Nifty FMCG, banks, financial services, and private banks move northward after the budget announcements. The reasons could be their policies turn favorable or an increased expectation of consumer spending is coupled with stability in the economy, directly impacting these sectors.
Conversely, indices such as Nifty PSE (Public Sector Enterprises), Nifty CPSE (Central Public Sector Enterprises), commodities, and media have remained underperformers. The reasons could be linked to the less benign perceptions by the market due to budget allocations or policy changes that are expected to have a relatively more adverse impact on these sectors.
The trend observed across Consumer Durables Index and FMCG Index is that they have delivered outperformance around 78% of the times post budget. This proves the strong post-budget performance for consumer driven sectors, possibly on account of boosts in expected consumer demand owing to positive policy announcements from time to time.
Hedging Strategies
Faced with such insights, here are a few strategies that investors can asΓ use to hedge against probable risks arising from budget announcements:
1. Index Put Options:
Purchasing index put options is a simple and most efficient hedging strategy. It assists investors in protecting their portfolio from the downturn of the market. In case the market goes down, the put options increase in value, which offsets the loss in the portfolio.For instance, buying put options on the Nifty Index can act like an insurance policy to protect one from a downward movement in the post-budget session so that it doesn’t effect the overall portfolio value much.
2.β β Sector-Specific Hedging:
Sector play: One can also look at sector-specific movements with a view to fine-tuning the hedging strategy. The rates of exposure can be suitably lowered for those sectors which do well post-budget, typically Nifty FMCG and Consumer Durables, or even increased in such sectors to exploit the expected gains.
On the other hand, the sectors which are most likely to underperform would be Nifty PSE and commodities. One can reduce the potential losses in such sectors by increasing hedging through put options or by reducing exposures. The former can be done effectively by buying a put option of sector-specific ETFs or by shorting the stocks in these underperforming sectors.
3. Diversification:
Diversification still forms the bedrock of most effective risk management strategies. Through investments across sectors and asset classes, the impact of sector-specific volatility can be arraigned on the investors. For instance, in a portfolio having a mix of equities, bonds, and commodities, this would help against adverse market movements.
4. Market Timing and Gradual Investment:
One can get into a staggered investment approach, increasing gradually the exposure to the market before and after the budget. This kind of strategy helps in averaging the cost of purchase and lessening the effect of market volatility on any single point of investment.
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Conclusion
It requires a judicious blend of strategic hedging and informed investment decisions to be able to straddle the market in the environment of Budget Day. By way of getting an idea about the trends in sector-specific ETFs, diversified portfolios, and index put options, an investor will be suitably armed toward insulation from probable risks during such times. Trustline Securities will be a formidable partner for any investor aiming to stride confidently and strategically into the complexities of Budget Day; it provides all-encompassing financial services through its advanced trading platforms.
(The author Vinay Gupta is Director, Trustline. Views are own)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
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