What is hedging and when should we do the hedging?

November 9th, 2010| Uncategorized.

What is hedging and when should we do the hedging?

Hedging

Hedging is the task which is done to reduce the fear of loss of money. For example, when we are having the gold with us and we invest it in the futures market to reduce the fear of loss when the gold rate decreases. If the rate is increased, they get profits or else if the rate is decreased, there won’t be loss for them. There won’t be the stage of profit and loss in the hedging process and it is better to sell the gold when the price is more and invest them into future markets when the price is low. There is a problem when they will invest against the market. The same is going on in the stock market. The fund managers are doing serious hedging when the market is growing suddenly and they fear to come out of it as what happens when they come out.

The name of the fund is reliance diversifund equity plan and the fund manger of this fund had invested in the shares and fields which he is having.  He had invested 50% of the amount in the top the companies like banking, software, oil and gas, SBI, ONGC, ICICI and reliance industries. The NIFT fund had increased by 20% in the last year but the income from these funds are only 8%. The value of the NIFT shares had increased by 20.1% in the last two years but the reliance share had increased only by 14%. The reason for this is the hedging and the investor had done hedging for 50% of the value as he had the fear of the downfall of the market. He had thought of investing the money when the market value decreases and kept the cash in his hands. There is no mistake of the fund manager in doing so but the profits for the investors will reduce.

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