IIFL Wealth Management Co., which runs India's best-performing equity fund, is buying protection in the options market as the rally lifts the nation's stocks to near a record.
The NSE Nifty 50 Index has come within 0.9 percent of its March 2015 peak after rebounding 28 percent from a low in February. At the same time, a measure of the cost of buying at-the-money puts is the cheapest since September 2006, data compiled by Bloomberg show.
"It's odd that 80 percent of stock positions are unhedged at a time when insurance is as cheap as you can get," said Amit Shah, co-founder of General Atlantic-backed IIFL Wealth, which has $13.5 billion under management and advisory. The IIFL India Growth Fund has returned 29 percent in the past year, beating 97 percent of its peers that track the nation's broader market, data compiled by Bloomberg show.
Indian stocks extended the longest run of monthly gains in two years as investors looking for higher returns than those on offer in developed countries add to their purchases of local shares. The Nifty is valued at about 17 times 12-month projected earnings, a level last seen in November 2010 that presaged the gauge's 25 percent drop in 2011. Rich valuations have left the $1.7 trillion market prone to swings sparked by events including a policy action by the U.S. Federal Reserve and the outcome of the presidential election, said Shah.
"There is perceived risk, which option prices are not factoring in," he said. "If we can see off December, the path is clear. Our long-term bullish call is intact." Shah said he's buying out-of-the-money puts linked to the Nifty to guard against a near-term retreat.
Calm has been the defining feature of some of the biggest markets over the past month as global central banks assured investors they'd be ready to react to any fallout from Brexit.
The CBOE Volatility Index, a U.S. gauge of investor anxiety known as the VIX, is more than 40 percent below its 10-year mean. The VStoxx Index, which tracks expectations of swings in the Euro Stoxx 50 Index, has slid 52 percent since a June peak. India VIX Index jumped 3 percent on Wednesday, rebounding from its lowest level since December 2014.
"The options market is in a wait-and-watch mode as it is best not to fight momentum in a liquidity-driven market," said Ajay Bagga, an independent market analyst in Mumbai. "We expect volatility to revive closer to the Fed and Bank of Japan meetings."
The Nifty and the S&P BSE Sensex dropped at least 0.2 percent at the 3:30 p.m. close after rallying to a 16-month high on Tuesday. The nation's benchmark gauges moved by more 1 percent in either direction only three times in the past 30 days.
Still, India's world-beating growth will be a magnet for investors seeking higher-yielding assets, Shah said. Asia's third-biggest economy expanded 7.1 percent in the quarter ended June 30 from a year earlier, the fastest among major economies, data showed last week.
Global funds have plowed $6.1 billion into Indian equities this year, surpassing last year's $3.3 billion inflow, data compiled by Bloomberg show. The purchases are the highest in Asia after Taiwan and South Korea.
"With half the world's debt carrying negative interest rates, flows to emerging markets can accelerate," said Shah. "Problem is, we don't know when the liquidity-driven rally will start to fizzle."