More often than not we see some drastic fluctuations in India Volatile Index or India VIX. In fact, in the last decade, there have been 12 occasions when it jumped by over 30% in a month. For its name, it is certainly volatile.
Because if you compare it with other indices like NIFTY 50, SENSEX, etc., they experience a pretty moderate fluctuation, something in the range of 5-10% annually.
Why is it so volatile? More importantly, what is India VIX in the first place? Why does it matter so much to investors? We found all the answers with the help of Hemant Sood, Managing Director of Findoc Investmart, Ludhiana. We will share it all here.
What is India Volatile Index or India VIX?
In simple terms, Indian VIX is a market sentiment indicator for NIFTY50 over the next 30 days. Thus, it measures the expected volatility in the index by assessing how positive or negative investors are.
In the words Hemant Sood, “a high VIX value means there is heightened market uncertainty and fear, and traders expect significant price swings in the upcoming days. On the contrary, a low VIX value symbolizes the investors' confidence in the market and stability.”
Explaining the technicality further, he adds, “India VIX is calculated by the National Stock Exchange (NSE) using the CBOE's computing technique. Put simply, it bases the value on the order book of NIFTY options, which essentially reflects the market sentiment and what investors expect regarding future price fluctuations.”
Why India Volatile Index is So Volatile?
India VIX is volatile because of two main reasons, first it is short termed, and second, it is based on the investors’ sentiments.
Explaining both the reasons, Hemant Sood said, “The short-term nature of the VIX is indeed a driving force behind the VIX volatility as this makes it highly sensitive to near-term market events.”
He adds further, “However, a more important reason is that it tries to gauge the sentiments of the investors, and sentiments are one of the most volatile entities, if not most. That is why India VIX is bound to have drastic fluctuation. Any economic data gets released be it GDP growth, inflation, or employment figures, there would be sudden spikes or drops in the VIX. Any development in geopolitical events, like elections, major policy changes, you name it, and it creates disruptions.”
Why India VIX is important for Investors?
There are many reasons why investors should understand India VIX and where it fits in the finance puzzle.
It can prove to be a crucial tool for assessing market sentiment, managing risk, maximizing returns and protecting investments. Investors should have a fair understanding of the index if they want to make informed decisions.
Touching upon the role of India VIX, Hemant Sood said, “India VIX is just as a barometer. If you know how to use it better, you will get better investment strategy insights and can manage market risk accordingly. You spot the right time to enter or exit the market based on the expected upcoming developments.”
Investors can employ various strategies that leverage India VIX to maximize ROI.
Trading Options Based on VIX Levels
The first one is to capitalize on the insights gained from India VIX and utilize options trading. This means, when the VIX is high, investors may consider buying options (calls and puts) to profit from potential price swings.
Adding insights, Hemant Sood Said: “During periods of elevated VIX, options premiums rise, this is the good opportunity for significant returns if market movements are aligning with the investor's sentiments.”
Further, he says, “On the flip side, if the VIX levels are going down, options are typically cheaper. This is the best time for investors to capitalize by buying options at lower premiums, speculate on future volatility and price increases.”
Hedging Against Market Risk
India VIX is also great for charting out hedging strategies. Investors can implement protective measures, such as buying put options, to safeguard their portfolios. This is immensely important at the time of heightened uncertainty, aiding investors in mitigating potential losses and secure their returns.
Adjusting Portfolio Exposure
India VIX also allows investors to proactively adjust their portfolio as per the changing market dynamics. Hemant Sood advises, “During a spike in VIX, reduce exposure to high-beta stocks sensitive to market fluctuations. And when there is a decline, increase in investments in such equities.”
Timing Market Entries and Exits
Lastly, India VIX can be a great indicator plan entry or exit. Hemant Sood says, “A rising VIX signals an impending market correction, a warning to exit positions. Likewise, a decreasing VIX signifies diminishing market fear, therefore, a favorable time to enter new positions or increase exposure to high-return assets.”
Conclusion
When it comes to investments, having more knowledge is very important. However, it is even more important to know what authentic sources of knowledge are. Using the information from these sources to base your investment decision is one of the best ways to securely maximize your returns and India VIX is one of them. It helps investors understand the market better and adds to their knowledgebase, helping them in data-driven decision making.