Dear @nithin
As we know mutual fund allowed to trade in f&o. I just want to know to what extent. How much it can bought and sold put and call options & futures.
For example, if AUM of xyz equity mutual fund is 100 cr. Can they sell PE of 100 cr (contact value wise) i.e 100% cash secured PUT and if any PUT becomes in the money, take the delivery of the same and sell it’s CALL i.e 100% stock secured ?
Thanks
Mutual funds can use derivatives only to hedge their portfolio and yes they can do covered calls as well. Hedging only to the extent of the portfolio value and covered call only to the extent of 15% of the stock held in that Mutual fund scheme.
Why is it limited to 15%? Why not the whole amount? What’s the point of protecting just 15% to downfall?
Covered calls have a limit of 15%, Covered call isn’t really done for hedging. It is more a way for mutual funds to earn some money from their portfolio betting that markets will not go beyond a certain price. So in a way, it is speculative.
You can hedge 100% of the portfolio using puts.
Dear @nithin
It’s means one can sell cash secured put 100% of portfolio OR only can bought put, because to hedge one can only bought ?
Thanks.
If the mutual funds hedge the portfolio for the downfall by buying puts, don’t they share the profits with the investors? Why do we see our fund in the red?
Ah no, just buying puts. Cash secured put is again like covered calls being speculative.
Buying puts cost a lot of money and it is almost impossible to time the markets. Most funds don’t really use puts that much and rightly. But the ones who hedge well do end up outperforming the benchmark or other similar funds. Of course all profits show up in the NAV of the fund.