KS Badri Narayanan Are you among those who fear that the stock market is ripe for a fall? As the stock market has been on an uptrend for the last few years and volatile in 2018 due to global slowdown and trade war fears, investors do need a product to capitalise on any downfall in the index.

However, for domestic investors, there are no products available in this space, except shorting stock futures or index futures, which is very risky. Buying index or stock put options could be an easier tool, but on most occasions due to time value, many investors are at the receiving end, as they are unable to time the market. Besides, most of the stock options are not very actively traded in India. Volatility index, another option, one can bet during turbulent times, is also a highly risky affair.

Few takers for F&O

Several education programmes and tightening of norms by SEBI have failed to deter retail investors from taking a plunge into the derivatives segment. The average daily turnover of retail investors has nearly doubled to ₹9 lakh crore last year, data compiled from stock exchange reveal.

So, is it not time to have a stable product such as an inverse index ETF which can be used by investors to hedge their risks?

An Inverse Index ETF provides the investor an opportunity to create a position which gives inverse (opposite) returns of the index. The index is designed to provide the inverse performance of the benchmark, representing a short position in the index.

There are several benefits to using inverse index ETFs.

The risk is limited, as the maximum loss one can suffer is the unit price of the ETF, just like buying a regular stock. This is much better than other bearish strategies such as shorting stocks or option strategies which can cause unlimited losses. Inverse Index ETF also allows an investor the opportunity to benefit from declining stock prices on daily basis.

Inverse index ETFs are a cost-effective way to express a bearish opinion. They typically like any other exchange-traded funds have low expense ratios.

Though currently domestic investors do not have any such option, foreign investors have the option to bet on downfall of the Nifty 50 index.

Taiwan experiment

Taiwan-based Fubon Asset Management had launched Nifty50 PR 1X Inverse in October 2014. Similarly, Hong Kong-based CSOP Asset Management had launched CSOP Nifty 50 Daily (-1x) Inverse ETF in 2016.

Fubon Nifty PR had provided a return of 2.22 per cent and 1.49 per cent in one-year period at the end of December 2018. Since inception, it gave a negative return of 8.63 per cent.

Almost 15 years ago, Benchmark Mutual Fund, pioneer of exchange-traded funds in India, had filed a document with market regulator SEBI for an inverse index fund. But Benchmark Mutual Fund, which was later taken over by Goldman Sachs and then subsequently by Reliance Mutual Fund, withdrew the document.

Though the time was not ripe then, as there were no proper checks and balances, SEBI can now consider allowing the product, as it has tweaked several rules in the futures and options (F&O) space since then.

Notably, making delivery compulsory in F&O is one of the key developments.

Besides, SEBI has tightened the eligibility criteria for securities in which F&O trading can be allowed and capped the positions that retail investors can take in the cash as well as derivatives segments, by linking the exposure to net worth.

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