These funds invest in both debt and equities, utilizing debt to increase returns. In order to boost returns, these mutual funds use financially leveraged investment tactics. These tactics include trading, taking out loans to buy assets, selling assets short, etc. A multiple of the benchmark or index that they follow is what leveraged funds deliver. These funds commonly use derivatives, such as options, futures, and swaps, to improve performance.
Leveraged mutual funds: what are they?
Each 1% increase in the Nifty50 may be amplified to a 2% or 3% increase by a leveraged ETF tracking the index using financial instruments and debt. The amount of leverage used in the ETF determines the extent of the gain. Utilizing borrowed funds to buy options and futures contracts in order to increase the impact of price fluctuations is known as leverage.
Leverage could also have an adverse effect, costing investors money. If the underlying index declines by 1%, the loss is magnified because of the leverage. Leverage has two sides because it can result in significant gains as well as devastating losses. Investors should be aware of the risks involved with leveraged ETFs because there is a much higher risk of losing money than there is with more traditional investments.
Leveraged ETFs’ management costs and transaction costs could have an adverse effect on the performance of the fund.
Margin is used by leveraged funds to operate in typical brokerage accounts. In order to purchase stocks in the hopes of making a profit, investors borrow money from brokerages. Simply put, you spend less money to get a bigger chunk.
Types of Leveraged Funds
- Money Market Funds – Money Market ETFs invest in treasury bills and other types of government bonds.
- Bond Funds
- Mutual funds that invest in the stock market and cover important industries are called equity funds.
- Index Funds
- Balanced Funds
- Specialty Funds