The Hindu Business Line : Birla MF plans to launch Index Enhancer Fund benchmarking Nifty

BIRLA Mutual Fund has lined up a scheme that will invest in the Nifty stocks with a view to outperform the index. The proposed Birla Index Enhancer Fund, once cleared by SEBI, will be an open-ended scheme aiming at long-term growth of capital by allocating mostly to equities and derivatives.

The fund manager will be expected to invest in almost all the 50 stocks in the S&P CNX Nifty in roughly the same weightage that they are represented in it. The fund will also take a limited exposure to cash and other liquid instruments.

Up to 100 per cent of the net assets may be allocated to the Nifty scrips, carrying a medium-to-high risk profile, under ordinary circumstances. However, the fund will be free to invest up to 50 per cent of its assets in derivatives, the offer document sent to SEBI for clearance has mentioned.

Birla Index Enhancer Fund, which will be benchmarked against the Nifty, will strive to provide returns over and above the performance of the Nifty. Portfolio balancing strategies, through the use of derivatives, will be used to improve upon what is achieved by the index.

Various derivative instruments, including stock index futures and options on stocks & stock indices, will be used by the fund manager.

It may be mentioned here that all mutual funds are allowed to participate in derivatives trading subject to regulatory norms. Fund houses regularly apply derivative and hedging options with the hope of protecting their portfolios.

As the offer document has pointed out, there is a carrying cost attached to futures that should result into future derivatives quoting at a premium to the underlying prices. Market forces, however, often change this equilibrium; in many instances, futures start quoting at a discount to such underlying prices. The fund manager will take advantage of these opportunities.