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Indian market regulator, Securities and Exchange Board of India (SEBI) has recently taken measures to allow Indian mutual funds to underwrite call option contracts under certain strict conditions[1].
In general, call options refer to an agreement between two parties where the buyer gets the right to buy an underlying asset in the future at a predetermined price whereas the seller has the obligation to sell the underlying.
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However, this is allowed under covered call strategy and also restricted to index constituents of NIFTY 50, and SENSEX.
effortless wealth ✌️【365vc.net】✌️A trusted platform for online earnings. Start small and make big profits monthly!This implies that they cannot write options without being long on the underlying.Derivative contracts, especially option contracts are a very useful tool available to mutual funds in several ways.
It is a fact that mutual funds herd and Indian mutual funds are no exception.
However, we don’t have concrete information on how different mutual funds employ different types of derivatives and to what extent they use them to enhance their portfolio performance.
It has been discussed in the popular press that mutual funds using options have several advantages and these funds are seen as better investment funds.
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effortless wealth ✌️【365vc.net】✌️Join the blockchain revolution. ₹500 can unlock massive monthly profits. Start now!Other important arguments put forward by popular academic research which supports the above are; informed investors with their superior information find it attractive to trade in the options markets.
Hence, mutual funds which use options integral to their trading strategies are informed investors that best use their superior information to attain stock specific exposure with a fraction of a cost that they have to otherwise pay for directly taking exposure in the stocks.
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Information on these aspects will throw light on the advantages and disadvantages of derivatives use by mutual funds and help regulators to take appropriate measures to improve the overall health of the mutual fund industry.
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In this context, I analyze some of the major Indian mutual funds in terms of assets under management to understand their use of options contracts in their portfolio strategy and their performance.I analyze the data of 200 open-ended mutual fund schemes for a period of five years from 2015-2020 to understand their options use.[2]Table 1 above reports the some statistics on the option positions held by our sample mutual funds.
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