India Vix and its implication on your portfolio

This article will introduce you with the meaning and understanding of an important concept related to India Vix. Through this literature, an investor will learn the impact of the India vix on their portfolio performance.

We have come out with an analysis based upon two periods: January 2010- December 2014 and Januray 2015- December 2020. The purpose of this analysis is to show how India Vix movement has impacted the Nifty 50 performance. This will have a direct impact on your portfolio return.

What is India Vix?

It is a measure of volatility in near future.Usually, during the periods of high markets volatility in either direction, the value of India Vix tend to rise swiftly . As volatility subside, the value of Vix decreases.

India Vix is the study of uncertainty that can arise due to any of the following reasons related to economical, political and global factors. At present, uncertainty has increased due to corona virus issue. This has shocked the world and disturbed the stock market movement. Have a look on 5 year India Vix chart:

You can see that India Vix has surged to 70 level in the month of March 2020 due to corona virus issue. This is first time that India Vix has increased to this level in its history. The average level of Vix is 10 to sub 15 level in normal markets and 15 level to 20 level in uncertain environment.

Investors use this to gauge the market volatility and base their investment decisions accordingly.

Who provide this data?

NSE India with collaboration with the Chicago Board of Option Exchange is providing this data. An investor can use this link to know India Vix value on daily basis.

https://www1.nseindia.com/live_market/dynaContent/live_watch/vix_home_page.htm)

How the value is calculated?

India vix is computed based upon the order book of Nifty options. It uses the best bid-ask quotes of near and next month out of money (OTM) Nifty options. It depicts the expected volatility over next 30 days. The value is calculated on annualized basis.

For example: The current India Vix value is at 70 level. It means that investors are expecting the Nifty to move 70% up and down from current level in next one year based upon implied volatility in OTM options. In case we convert the value on monthly basis then an investor is expecting the market to move 6% up or down i.e 70/12 value.

Significance of this value

During high volatility period, an investor can either exit their portfolio or hedge his portfolio using protective put.

Hedging an Equity Portfolio During Financial Crisis through protective put.

Due to Covid 19 outbreak, the investors are experiencing this high volatility in the markets. Investors around the world have come into panic and liquidating their portfolios. It has resulted into highest India Vix value at 70 level on March 2020. It is not a good news for the market as this volatility has already shattered the market. Also due to this Nifty has came down from 12400 level to 8600 level.

We have analysed the India Vix impact on the Nifty 50 in last 10 years. The data is divided into two periods:

• January 2010 to December 2014.
• January 2015 to March 2019.

The intent is to make you understand the impact of high volatility on your portfolio and to safeguard the returns in your equity investment.

India Vix V/S Nifty 50 performance for the period January 2010 to December 2014

We have complied the data of both Nifty and India vix for the period January 2010 to December 2014. By analyzing the data, we can see the reaction of Nifty 50 towards India Vix.

What we found?

When ever, India vix value is less than 20 level then Nifty 50 has surged as as can be seen from the following data points:

1. During January 2010 to December 2010, the Nifty moved from 4882 level to 6134.5 level due to decrease in India Vix Value from 26.65 level to 16.56 level.
2. For the period September 2011 to January 2013, the Nifty has moved to 6034.5 level from 5001 level as India Vix value has decreased from 31.94 level to 14.13 level.
3. There is only one exception to this relationship. In the period February 2014 to April 2014, when both Nifty and India Vix has increased simultaneously on the back of Center election expectation.
4. Nifty 50 has experienced best returns during January 2013, February 2014 and November 2014. In all these periods, India vix was at lowest points less than 15 level.

When ever, the value of India Vix has moved to above 20 level than Nifty 50 has fallen sharply. This can seen during following periods:

1. During the period December 2010 to September 2011, the India Vix value has increased from 16.56 level to 31.94 level resulting in the fall of Nifty 50 from 6134 level to 5001 level.
2. The same thing happened in the period January 2013 to August 2013, where India vix surged from 14.13 to 27.81 level. At this time, Nifty moved down from 6034.75 level to 5431 level.
3. There is only one exception to this relationship. During a small period Feburary 2014 to April 2014, the India Vix and Nifty 50 surged simultaneously. This is due to center election expectations.

This chart clearly depicts that both moves in opposite direction to each other. During period of uncertainty, investor is happy to sell the equities and buy only when India Vix subside.

India Vix V/S Nifty 50 performance for the period January 2015 to March 2020

In this period too, a similar trend is identified between Nifty 50 and India Vix. Both have shown an opposite relationship by indicating a negative correlation.

During this period, Nifty has surged when India Vix has shown a downward trend and reached between 10 to 15 level. And with the increase of India Vix above 16 to 20 level, Nifty has always fallen.

At present India Vix has reached to highest level at 70. This level has never been seen earlier and resulting in steep fall of Nifty from 12400 level to 8600 level with in one month.

Conclusion

We always ignore the relevance of India Vix concept while constructing a stock portfolio and land us in deep trouble. It is always better to create a portfolio of stocks only in case, the India Vix is going to drop significantly below 15 level.

This happens only when the markets are going through healthy environment without any foreseeing trouble in near future. Investors are feeling confident about their investment in equity market. The world is sitting with peace and giving an opportunity of growth to world economy.

In the present scenario, due to corona virus issue. All are feeling scary about equity investment leading to extreme volatility. This is not a conducive time to invest in the stock market in form of lump sum investment. As still no body knows how bad, things can become due to this virus issue.

So we recommend you to put your hard earned money only in case the India Vix start falling. This will happen only when there is any positive news start flowing towards corona virus issue. This will reduce the volatility measured by India Vix. So keep a watch on this index to construct an equity portfolio.

Either you can create a portfolio in a systematic manner. As this will provide a cushion to downside by the concept of averaging in your portfolio.

We have written an article on the stocks that can be added in portfolio through per month investment.

Global Markets are bleeding and this bear market is giving chance to build long term stock portfolio in systematic manner for next one year