Futures play an important role in portfolio diversification by allowing investors to add different types of assets to their investment mix. Futures contracts let you invest in commodities, currencies, stock indices, and more, which can reduce risk by spreading investments across various markets. This helps protect your portfolio from losses if one asset class performs poorly.

What Are Futures Contracts?

Futures contracts are agreements to buy or sell an asset at a set price on a future date. They are standardized and traded on exchanges. Futures can cover assets like commodities (gold, oil), stock indices (Nifty, Sensex), and currencies. Investors use futures to hedge risks or speculate on price changes.

How Do Futures Help Diversify Your Portfolio?

Futures allow you to invest in assets different from stocks or bonds. For example, adding commodity futures like gold or oil can balance your portfolio during stock market drops. Since futures often move independently of stocks, they reduce overall portfolio risk and improve stability. This mix helps protect your investments against market ups and downs.

Can Futures Be Used for Hedging?

Yes, futures are often used to hedge or protect your investments. For example, if you own stocks, you can sell futures contracts on a stock index to reduce potential losses if the market falls. This strategy helps manage risk and keeps your portfolio safer during volatile times.

What Are the Risks of Using Futures?

While futures help with diversification, they also come with risks. Futures trading involves leverage, meaning small price moves can cause big gains or losses. It requires knowledge and experience to avoid large losses. Also, futures contracts have expiry dates, so timing is important when using them.

How to Start Using Futures for Diversification?

To start using futures for portfolio diversification, learn the basics of futures trading and market behavior. Open a trading account that offers futures trading, like Angel One. Begin with small positions and consider using futures to hedge or add assets not available in stocks or bonds. Always monitor your positions and understand the risks.