Should you consider 2 Mutual funds NFO’s that are betting on stock options?
Generally, mutual fund schemes launch close ended schemes. However, now there are 2 unique mutual fund New Fund Offers (NFO’s) which have come to market for subscription which are betting on stock options. These unique mutual fund NFO’s would invest in stocks and index options / stock options. Should you invest in such new mutual fund NFO’s that are betting in index options? What are the risks involved if you want to invest in such new fund offers?
What are those 2 new unique mutual fund schemes?
There are two new mutual fund NFO’s Reliance Capital Builder Fund-II Series-B (Maturity – 3 years) and ICICI Prudential Growth Fund Series – 7 (maturity – 42 months) and these are close ended schemes which have come for subscription now. Till now there are no such unique mutual fund schemes that invest in stock options / index options apart from investment in equity.
How do these schemes work exactly?
The amount would be invested in 80:20 ratio, i.e. 80% of investment in stocks and 20% in the index / nifty options considering the maturity period. Fund manager would trade in NIFTY options for higher returns.
Let explain with an example. If you have invested Rs 1000 in this scheme, the scenarios may look like this.
Your investment would be invested in the ratio of 80:20, i.e. Rs 800 in equity and Rs 200 in NIFTY options. There could be 3 scenarios and collectively your gains may look like this. This is indicative nos and returns may vary.
In 1st year, Rs 800 investment in equity would move to Rs 640 (equity market negative returns), 2nd year, it would move to Rs 800 (no improvement comparing to your investment) and in 3rd year, it would move to Rs 1,200 (positive return on equity market)
In 1st year, Rs 200 investment in NIFTY options would move to Rs 0 (due to negative returns), 2nd year, it would move to Rs 0 (no return in the market) and in 3rd year, it would move to Rs 500 (positive return). Options upside depends on upward movement, but downward is limited.
Total return by the end of 3rd year / maturity period is Rs 1,700, indicating a 70% return in 3 years.
What are the risks involved?
- Investment in NIFTY options can screw up your investment as the amount invested for 20% may turn to zero.
- Close ended schemes would close after 36 months / 42 months, leaving no scope to wait if the markets are in a down trend.
- No options for you to exit before maturity period of 36 months / 42 months offered by such schemes.
Who should invest?
- Investors who are positive on the equity market and expect good growth in equity markets in next 3 to 3.5 years.
- Investors who believe that stock options / index options / nifty options may fetch good returns in next 3.5 years
- Investors who understand NIFTY options on how they run.
- Investors, who are willing to take risks by investing in such high risk investment model.
Conclusion: Mutual fund houses are launching unique and variation models in close ended mutual fund schemes to raise fresh money from investors. Investors should understand on how NIFTY OPTIONS run and should be willing to take higher risk. Though mutual fund houses are betting on getting higher returns by investing in such stock options model, one should carefully review before investing in them. High risk investors can park up to 5% of their money in such high risk, high return investment options after considering such risks.
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Should you consider 2 Mutual funds NFO’s that are betting on stock options