Derivative Funds

Derivative Funds

The suitability of any fund depends upon its objective. In case of derivative funds also, it will depend upon how they intend to use derivative instruments. For example, there are a few arbitrage funds which try to capitalise upon the mis-pricing between the spot and futures prices of a particular stock. Therefore, they use derivatives extensively in their portfolios but their positions are always hedged. A simple example of hedging would be to buy a particular stock and sell its future contract. Such an off-setting position would insulate the investment from market fluctuations. However, hedging often caps both the upside as well as the downside potential, making it a low risk-low return investment. Such a risk-return profile makes such funds comparable with income funds, and hence are suitable for investors who are looking for moderate returns with lower risk. Benchmark Derivative and JM Equity & Derivative are two such funds which have generated returns of 7.30 and 6.23 per cent respectively in the last one year.

In contrast to the above strategy, an un-hedged exposure to certain derivative instruments can be quite risky. Therefore, any fund with the objective of generating returns by taking unhedged positions in the derivatives may have a potential to generate higher returns than a diversified equity fund but will also be relatively more risky. Recently, Reliance Equity Fund has been launched which would seek to use derivatives more actively. But it is a new fund and right now nothing much can be said about it.

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Sumit K. Gupta
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Self Thought: The only Im-mortal thing in this world is DEATH. Everything else dies one day.