Apr 3, 2008

MF industry prepared to entrap unstable market

Mutual funds, which were affected by the sharp market fall, are planning schemes that will give fund managers the flexibility to adopt strategies in line with the market conditions. Fund houses want to ensure they are not restricted by the fund's investment mandate about having to invest in certain sectors even in case of change in sentiment.

JM Financial Mutual Fund has obtained approval from the Securities and Exchange Board of India to launch its multi-strategy fund, an open-ended equity-oriented fund that will adopt a host of strategies depending on the fund manager's view on the market. The scheme aims to provide capital appreciation by investing in equity and equity related securities using a combination of strategies to provide optimum returns to investors.

The BSE has been falling by around 24% from its peak on 10 January 2008 to 31 March 2008.

According to the offer document, if the fund manager expects the markets to head downwards, the scheme can hedge exposure to equity either fully or partially by initiating short futures positions in the index.

The fund will also take advantage of mispricing opportunities by shorting stock futures within applicable limits. Moreover, the fund manager will use put and call options, depending on his view of the market.

ICICI Prudential, in the draft prospectus submitted to SEBI for its long-short fund, speaks about how it would generate extra returns. ICICI Prudential Long Short fund is an open-ended equity scheme that seeks to generate long-term capital appreciation from a portfolio that is invested predominantly in equity and equity related securities and the balance in debt securities and money market instruments. The fund may also take short positions in stocks and/or index.