Should you consider 2 Mutual funds NFO’s that are betting on stock options?

Mutual funds NFO that are betting on stock optionsShould 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.

Also Read: What are the Best Mutual Funds to invest for 2015?

Total return by the end of 3rd year / maturity period is Rs 1,700, indicating a 70% return in 3 years.

Mutual funds NFO’s that are betting on stock options

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.

Also Read: Which are the mid-cap / small-cap mutual funds that have given superior returns?

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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Suresh
Should you consider 2 Mutual funds NFO’s that are betting on stock options

The Author

Suresh KP

Suresh KP i.e. me have written 1,800+ articles on this blog. I love doing analysis on various Best Investment Plans like mutual funds, Stocks, IPO's, NCD Bonds, Insurance products. If you like our blog, you can share some of the good articles on your Facebook or Twitter. This would be the BIGGEST gift which you would be giving to us.

10 Comments

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  1. The options are used for hedging or speculation? In your example, it looks like they are used for active speculation only.
    Im a little perplexed that they arent using the options for hedging and using them for speculation instead!

  2. U just explain about option…..means they only invest in nifty cal option ??? In the bear market also by put option dey can make lot f profit right ? R deyonly invest in long term nifty call option only ???? Plz explain

    1. Partha, Yes, this would be done in all markets.

  3. Hi Suresh,

    Thanks once again for the insightful analysis. I have one doubt though. When I looked up in the offer document for Reliance Capital Builder Fund II Series B, NFO, it mentioned following breakdown for investment:
    1, Diversified Equity and Equity related Instruments………… %:100% 80%……………Risk: High to Medium
    2. Debt and Money Market Instruments……………………………. % 20% 0% ………………Risk; Medium to Low

    The 20% allocation mentioned is with medium to low risk. but according to your article it will invest in high risk stock options. Am I missing out on something?

    1. Akshay, See point no.1. Stock/NIFTY options falls under equity related instruments. It is high risk to medium risk.

  4. Dear Suresh,

    I am hating these Close ended schemes because of my past experience.
    If you look at the past close ended mutual fund schemes maximum it
    gains LOSSES only.

    Thanks

    1. Ravi, Thanks for your feedback. As you indicated there are several risks associate by investing in such close ended schemes which invests in equity.

  5. Dear Suresh, You have not mentioned about the tax implication of this scheme. Whether it is treated like equity or debt scheme.

    1. Hi Mani, Since they invest 80% in equity market, these are treated like equity mutual funds only. They have maturity after 3 years only, hence there is no tax on returns generated from such schemes.

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