Active investing: Equity mutual funds have built up a creditable record over the past few years by consistently delivering more than their benchmarks have. They have even outperformed the S&P CNX 500, a benchmark which, unlike Nifty, is not traded in the market (the Nifty can be traded through index funds and exchange-traded funds).

Beating non-traded benchmark presents considerable difficulties as the stocks that are part of the index may themselves be illiquid and, therefore, difficult to invest in. In this context, the performance of equity funds only appears more impressive.

Between May 13 and 21, the S&P CNX 500 shed 13.6 per cent. A number of equity mutual funds have done better. On an average, a select list of 12 equity funds, which account for a substantial proportion of assets under management, have declined only by 11.3 per cent. Some, such as Franklin India Prima and Principal Growth, have done even better than CNX Midcap 200, which is one of the better performing funds.

The performance since mid-January has also been better than that of the major indices. Stock prices rose to their peaks in mid-January and the market has been trending down since then. The S&P CNX 500 lost 19.6 per cent during this period.

The select list of funds has only lost 13.3 per cent, on an average. So, sticking to active investing continues to be an attractive option even during a market downturn.

Hedging event risks: On April 30, had you bought a Nifty put option with the strike price of Rs 1,910, which is expiring on May 27, its current price is Rs 575 and you would have made a clean profit of Rs 436.

This profit would have helped you hedge the losses that you would have suffered on your equity portfolio.

It is true that, in hindsight, the things we should have done appear glaringly simple while at the end of April, things did not look so bad for the market.

The point, however, is that investors should get into the habit of hedging risks that stem from events such as elections, Budgets and Supreme Court rulings. The outcome of these events cannot be predicted but it could prove disastrous. Investors now have the tool to apply such hedging strategies.

In addition, hedging is a conservative strategy. It allows you to lock into your profits while at the same time sacrificing a part of the potential upside.

Judging by the sharp upturn in prices in 2003, hedging event risks should have been a straightforward decision.

Fund managers did precisely that when raised the cash position in their funds. That ensured that the entire portfolio was not exposed to downside risks.

Since ordinary investors do not have the luxury of inflows, only selling can enhance cash position. Experts do not advocate such a strategy. In this context, buying put options does make sense.

Incidentally, had you not bought put options at the end of April, you have a chance of doing so now. This is because the Budget is just around the corner and you might want to buy some protection against risks such as a rise in taxation.

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