What is Leveraged Funds & How it Works?

These refer to mutual funds that make use of aggressive investment techniques of financial leverage to deliver superior returns. Financial leverage techniques include short selling, buying assets on margin, options trading and the likes. Leveraged mutual funds deliver multiples of the index or benchmark that it tracks.These funds typically make use of derivatives, including swaps, futures and options for maximum capital appreciation.

Leveraged funds function by using conventional brokerage accounts wherein investors borrow money to purchase stocks with the objective to maximise gains. For instance, an investor

buys mutual funds worth Rs.1 lakh and borrows Rs.50,000 additionally with the objective to increase exposure.With an increase in the value of mutual funds, returns would also be more compared to the initial investment. That being said, there is considerable risk involved as the investor may incur significant losses should there be a dip in the value of mutual funds . Therefore, the investment should depend on the investor’s risk-appetite.Usually, leveraged funds entail higher operating expenses as compared to other funds, with the expense ratio ranging between 3-5% every year.{2D743194-97C2-43F9-BC28-AEC370801ECD}

Some of the critical benefits have been listed below:

• Easy track of index Leveraged mutual funds thoroughly track the underlying benchmark. It follows that you can plan your investment strategy basis this data instead of relying on a particular mutual fund. This checks the risk exposure of your portfolio.
• Cost-efficient investment With leveraged mutual funds, performance fees and per-trade transaction expenses aren’t applicable. This gives you the required flexibility to invest according to your financial convenience over a period of time instead of investing a lump sum.
• Diversification Leveraged mutual funds have the potential to generate sizeable gains irrespective of the size of account. Also, such an investment allows investors to access a diversified and well-managed portfolio in capital markets, something that would otherwise be challenging with a small investible amount. A diversified portfolio keeps volatility in check while maximising the potential to generate superior risk-adjusted returns.

Also Read: Benefits of Investing in Equity Mutual Funds

These funds can be categorised into:

• Money market funds These invest across government securities such as treasury bills (short-term security) and government bonds (long-term security).
• Equity funds These primarily invest in the stock market across top-bracket categories such as healthcare, IT, FMCG and telecommunication, to name a few.
• Index funds These invest in equities and other fixed-income securities that follow a specific benchmark, i.e. BSE-Sensex, NSE-Nifty, etc.
• Balanced funds These funds generally stick to a mix of bonds and stocks. Holdings are typically balanced between debt and equity with the focus on both growth and income.
• Bond funds These invest in fixed-income securities including treasury bills, debentures, mortgages and bonds.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.