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Suresh Krishnamurthy

Investors can consider insuring a part of their portfolio against a possible decline in values to guard against an `event risk' ahead of the Budget to be presented on February 28. The Budget promises to unveil a number of initiatives that would boost industrial growth. A big concern would, however, be a high fiscal deficit. Considerable political pressure for an increase in the proportion of tax revenues to the gross domestic product to fund a larger plan outlay also exists. This could trigger an increase in taxation of corporate profits or income from investments. The effect of the budgetary numbers on interest rates is also not clear.

Stock markets have often remained stagnant in the period between February and October. In this period, since 1992, the Sensex has gained 10 per cent or more in only three years. On the other hand, it has lost more than 5 per cent in six of these years and remained stagnant in three more years. Given this backdrop, it may be prudent to hedge a part of the portfolio by shorting index futures or buying puts. Contracts maturing in March and April would be appropriate for this purpose.

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