- Wealth PMS (50L+)
NSE has announced the starting of derivatives on the CNX 100 and CNX Nifty Junior from June 1. Symbols are CNX100 and JRNIFTY respectively.
What does this mean for you? Any index that is traded on derivatives (futures and options) brings remarkable stability to the underlying stocks. The idea being, since futures and options are traded, people will buy stocks which go down severely because they are long on the index.
My theory is that this is the biggest reason that actively managed mutual funds perform poorly compared to indices. When indices have futures on them, buyers who don’t care about individual stocks will still buy them to hedge against an index derivative. Funds which bet on all sorts of stocks will not perform as well because people who buy their stocks have to have a good reason to do so – and more likely than not, that knowledge is not widespread, or consistent enough for the market to recognise.
For example – I could buy a basket of stocks that comprise the NIFTY and then sell the NIFTY Future (or write a call option) thus giving me a small amount of arbitrage income and hedging my risk.
For this I would most likely buy stocks I don’t care about buying for their fundamentals (like IT Stocks or Tata Steel or such). But the index future offers me a lower risk hedge so I must buy them anyhow. This funda of “buy them even if I don’t like them” is what introduces liquidity and the value of these stocks won’t fall phenomenally. Till now we only had futures on the NIFTY, Bank Index, and IT Index, but with the inclusion of the Nifty Junior and Nifty 100, we get a wider spread to work with.
So introduction of index futures will most likely create more positions in these index stocks. Common to both new index futures are stocks like Ashok Leyland and Moser Baer which I hold, and there are some others I will now look at buying because of this new derivative, like CONCOR, Ingersoll Rand, Indian Hotels and BEL.
My feelign is that beacuse of these futures, in the long run the heavyweights in each of these indices is going to gain a lot from what the prices are today.