`Investors will make losses even when the markets are going up'

Rajesh Abraham

All equity-oriented schemes have the option to hedge and MFs are trying to "sound new" as they have run short of ideas

Mumbai, May 17

Profit from a falling market appears the new flavour at mutual funds.

In a bid to lure investors to new funds offers (NFOs), fund houses are lining up schemes that promise to maximise gains in a falling market. Experts caution, all equity-oriented schemes have the option to hedge and MFs are trying to "sound new" as they have run short of ideas.

After Reliance Mutual Fund, which collected a record Rs 5,700 crore and promised to deliver profits, whether the markets went up or down, Tata MF has launched a scheme that uses hedging tools to maximise profits in a falling market.

Others, including Benchmark MF and ICICI-Prudential, have submitted proposals to SEBI for launching schemes that will try to maximise gains when the markets go down.

`Inverse Index Fund'

Benchmark's `Inverse Index Fund' proposes to make returns to the same extent as the daily performance of the S&P CNX Nifty Index but inverse to its actual trend.

"Short exposure would be in derivative instrument of S&P CNX Nifty Index and the derivative instruments of the constituents of S&P CNX Nifty Index in the same proportion as in the S&P CNX Nifty Index and ETFs (Exchange Traded Funds) linked to S&P CNX Nifty Index," Benchmark said in its filings with SEBI.

Just like investors make money when the markets go up, short sellers make money when share prices come down. MFs propose to use shorting strategy featuring stock or index derivatives to achieve the same end.

However, it is important to read the fine print.

"All equity oriented schemes have a provision to take short positions, as per the prospectus. It seems that in the rat race to raise money through NFOs, mutual funds are coming up with schemes that sound interesting and new to investors," Mr Dhirendra Kumar, CEO of mutual fund tracking firm Value Research, said.

With MFs aggressively marketing NFOs as products that would make money using `shorting opportunities', Mr Kumar said, investors need to be cautious.

"Earlier, investors were sure that they would make money when the markets go up. Now, there is a chance that investors will make losses even when the markets are going up," he said.

Mr Ved Prakash Chaturvedi, Managing Director of Tata Asset Management Ltd, said its `Tata Equity Management Fund' aimed to exploit a short-term opportunity, as and when it arises, to maximise returns in " a potentially volatile market." "The index derivatives will be used mainly for the purpose of hedging. However, the fund manager may, if the opportunity exists, use stock specific derivatives to earn profits," he said, at the launch of the scheme.

Since the stock markets were trading at `bubble levels', as termed by some leading foreign brokerages, industry officials expect more funds to join the bandwagon that bet on the markets to go down in short-term.

(This article was published in the Business Line print edition dated May 18, 2006)
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