A new fund category benefits investors even if the markets fall - here's how to

Copyright © HT Digital Streams Limit all rights reserved. Sift’s can invest in long and short strategies. Unlike traditional mutual funds that are mainly thriving when markets rise, sieve is not attached to one direction. (Beeld: Pixabay) Summary Sebi’s newly formed Specialized Investment Funds (SIFs) allow fund managers to benefit from rising and falling markets using long-short derivative strategies. But is it right for you? If the markets fall, most investors lose sleep. But a new breed of funds in India is designed to make money even if shares go south. Specialized Investment Funds (SIF’s), introduced earlier this year by the Securities and Exchange Board of India (Sebi), is the arrival of a new product category. Unlike traditional mutual funds that can only take long positions (that is, stocks that expect prices to rise), Sift’s fund managers give the flexibility to also take advantage of a decline in stock prices. So far, three asset management companies – Edelweiss, Quant and SBI – have introduced their first set of sieve’s. How it works can invest sieve’s in long and short strategies. Unlike traditional mutual funds that are mainly thriving when markets rise, sieve is not attached to one direction. They can acquire opportunities in a bull market, but also produce returns during clumsy phases or when the markets are flat and reached. “Sift’s aims to optimize portfolio yields and reduce the risk at the same time,” says Bhavesh Jain, co-head of factor investment, Edelweiss AMC. To achieve this, trust sieve on the equity disorders market, which includes futures and options (F&O) instruments. This enables traders to take long and short positions on a share – to start whether its price will rise or fall – and make money if they are right. This means that even when the markets fall, sieve can still try to make a profit by taking the right positions. Using derivative strategies such as the covered call or a short strangle, fund managers can gain profits during market cycles that are unlikely to see big profits or remain a series -bound. For example, if a fund manager believes that a stock will remain steady, they can use a covered call strategy. In this approach, the fund still holds the shares, but sells a call option with a strike price slightly above the current share price. The fund includes the extra income from the option premium – the price of the option contract – which affects worthless at expiration if the share price does not match the strike price. In this case, the premium becomes the profit of the fund manager. The strategy can cause losses if the stocks rise sharply, but in a flat or generous rising market it usually performs well. Suppose the share of a company is in a short strangled strategy at £ 3,060. A sieve driver believes that the price will not move sharply during the month. They can sell a call option at £ 3,120 and an option at £ 3,000. As long as the share between these levels remains at expiration, both options expire worthless, and the fund takes the premiums as a profit. If such short positions are created without holding the underlying stock, it is called naked or unseen short positions. Sift rules allow up to 25% of the portfolio allocated in this way. “There are risks for derivative strategies if not managed properly. Theoretically, if there is a sharp swing in the price of a share, and the position is not set off on time, the option selling can see significant losses,” said a F&O expert that requested anonymity. Joseph Thomas, CEO of Emkay Wealth Management, said: “Fund managers with the required skill and experience in the derivative market must be able to manage these risks. In contrast to mutual funds, where investors can relieve units at any time, SIFs offer limited redemption windows – which is a lot of money for the bumper sift sieve. Investors who seek immediate liquidity can therefore find them less flexible. Even in PMS ES, higher exit load is charged to discourage the investor early redemption, “he said. Returning expectations of SIFs depend on the fund-broadweg category, shares long short, hybrid long short and debt long short sieve. Hybrid Langkort Sieve invests in stocks, debt and stock derivatives. was the average return of two years for the long short strategy 10.1%, compared to 6.6% for the arbitrage fund. The difference is that sieve brings more instruments, such as the ability to take short positions and optimize advanced derivative strategies, the portfolio returns must optimize. Co-founder, ionic wealth. He noted that sieve’s long only mutual funds can underperform in a strong bull market, as part of the portfolio can be linked in short positions intended to cushion potential disadvantage. “Sift’s are a good balance for a traditional mutual fund portfolio as it offers a better risk-adjusted returns over longer periods,” Jain said. “It’s hard to predict the returns of a particular sieve because each sieve will have its own investment strategy … but in general, investors should not look at sieve’s to chase high returns,” Joseph of Emkay Wealth said. “For example, a stock sieve can offer 150-200 basis points higher returns than a passive strategy with a Nifty-labeled passive, as only 25% of the portfolio can be exposed to derivatives to improve returns.” Quant AMC founder and investment officer Sandeep Tandon said their hybrid sieve intends to “present the experience of a balanced pre -funded fund with a long short strategy” while sifting a “flexicap with a long short strategy”. Tandon, however, warned that sieve underperformed in a furious bull market. Although that may not be the case now. “In the difficult phase of a bull run, like the one we are going through now, a well-executed sieve strategy must do well,” he said. Eventually, a lot of the skill of the fund manager depends. “Is the fund manager very aggressive about the discount strategy or to be conservative, because the deficit is a little tricky,” Tandon said. “Sifts in general are aimed at offering better risk-adjusted returns by reducing the volatility of the portfolio,” Joseph said. Tax sieve is taxed like mutual funds. A sieve with exposure to equity of 65% (including stock derivatives) will be taxed at 12.5% ​​long-term capital gains tax rate after one year’s holding period. Profits up to £ 1.25 lakh will be tax -free. Profits from less than one year are kept as short -term capital gains at 20%. Sift that owns 35-65% shares (including stock derivatives) will be taxed at 12.5% ​​tax rate on long-term capital gains after two years. Profits from less than two-year relationship will be taxed as short-term capital gains at the investor’s plate rate. Debt -oriented sieve with 65% or more exposure to debt instruments will be taxed against the investor’s plate rate, regardless of the period. No debt has been launched yet. What investors need to do are sophisticated investment products intended to reduce volatility with derivatives. Financial planners suggest that investors should only consider them after building a solid core portfolio through equity and debt interruption funds. “It is intended for investors who have several years of experience and understand the stock markets well. Only investors who understand how derivative markets work should amount to sieve’s,” says Vivek Rege, founder and CEO of VR Wealth Advisors. “Short positions can protect the portfolio from volatility, but to some extent if such exposure is limited to 25% of the portfolio.” Earlier, long hort strategies were available mainly by alternative investment funds (AIFs), which cater for high net value individuals with a minimum ticket size of £ 1. SIFs, with a minimum investment of £ 10 lakh, open access to such strategies for a larger investor base. It also offers additional benefits: a limited expenditure ratio of 2.25%, no performance fee and mutual fund-like tax. “Investors should be aware of the lack of a record in the sieve space, so they may want to start with smaller assignments,” says Vishal Dhawan, founder of Plan Ahead Wealth Advisors. “For a long -term core portfolio, regular mutual funds offer many options. Investors should consider sieve as tactical products that may be part of an investor’s satellite portfolio,” Rege added. Before considering a sieve, see if the management team has the necessary skills and experience in the derivative market. If used correctly, derivatives can help manage market volatility and even increase portfolio yields, but if it is treated incorrectly, it can lead to losses. Catch all the business news, market news, news reports and latest news updates on Live Mint. Download the Mint News app to get daily market updates. More Topics #Market Cycles #Mutual Fund Read Next Story