Hedge your portfolio to solve the dilemma of investing or staying in cash.

Markets continue to exhibit a great deal of volatility. So far it looks like a pull back rally after the steep fall over the last two weeks; however, markets have always managed to surprise participants. So what does an investor do? If he holds back cash there is danger of loosing out on the next leg of the bull market. If he invests his cash and the market falls down another ten percent, as most market analysts believe, then he runs the risk of a significant drawdown on to give you his portfolio. In addition he runs the risk of having no surplus liquidity available, if and when the market reaches an undervalued stage and offers a great buying opportunity. One way out is to invest fully and hedge your portfolio by buying 4100 Nifty Put of November series, available at around Rupees ten. In case the markets do not crack more and eventually rally, this is a small insurance amount that you have paid. In case they fall another 10 percent, this put will generate enough profits to give you liquidity to buy more shares at a very attractive level of the market. Number of nifty puts to be bought should be roughly equal to your portfolio value. For instance, if your portfolio value is Rs 25 lacs, buying 600 nifty puts would hedge your portfolio adequately. The premium which you will pay will also not be of a very high amount.