Investors are constantly playing their cards to bring out the maximum returns from their investment. Leveraged funds are one such way to knock the stock market’s overall performance. These funds hold both debt and shareholder equity and use the debt to optimise the returns.
Read further to know more about this ETF in detail.
These are mutual funds that utilise financial leveraged investment techniques to maximise returns. These techniques include trading, buying assets on margin, short selling, etc. Leveraged ETFs provide a multiple of the index or benchmark that they track.
These ETFs typically utilise derivatives like options, futures and swaps to amplify the performance. Below is a brief discussion of how they work.
Leveraged funds function through standard brokerage accounts, using margin. Investors borrow money from brokerages to purchase stocks intending higher gains. In simple words, you buy a larger portion in much smaller capital.
For instance, you buy mutual funds worth ₹ 60,000 and borrow ₹ 60,000 for additional investments. Thus, returns will be relatively higher than the initial investment with an increase in the mutual fund’s value.
However, this brings a risk of experiencing significantly higher loss in case of a dip in the mutual fund’s value. Therefore, the investment will depend totally upon the investor’s risk appetite. Also, the cost of operating leveraged mutual funds is much higher than other funds. The expense ratio may range between 3% and 5% a year.
Here are some benefits of these exchange-traded funds -
These funds track the underlying index thoroughly, which eases your investment strategies. This is better than relying on the data of a certain type of mutual fund. These funds also ensure lower exposure to risk and excellent investment performance.
Leveraged funds ensure high returns to all the investors regardless of their investment. Investors who opt for a shorter tenure gain similar returns than those who invest for longer.
These types of mutual funds come with the benefit of not having per-trade transaction costs. This encourages the investors towards short-term swing trades.
With the advantage of not having per-trade transaction costs, these also have no performance fees. Therefore, you can invest small instead of a lump sum according to your financial convenience over a course of time.
A diversified portfolio is somewhat challenging with small investments in the capital market. But fortunately, these ETFs allow attaining a diversified portfolio that ensures optimum returns and low risk.
|
Types |
Explainations |
|
Money Market Funds |
Such ETFs invest in government bonds such as treasury bills (short-term) |
|
Bond Funds |
These funds invest in fixed-income assets such as bonds, debentures, treasury bills, and mortgages. |
|
Equity Funds |
Mutual funds that invest in the stock market, covering all categories like healthcare, IT and telecommunication, industrials, financials, etc. |
|
Index Funds |
These ETFs invest in assets that generate fixed income and follow a specific index like NIFTY 50, SENSEX, etc. |
|
Balanced Funds |
Such leveraged ETFs invest in a combination of bonds and stocks where holdings are balanced between debt and equity. |
|
Specialty Funds |
Funds like these invest only in distinct assets such as real estate, currencies, funds of funds, etc. |
Some cons of leveraged funds are stated below -
Investors must keep in mind their tolerance of risk before opting for investing in leveraged funds. Additionally, they must consider the higher expense ratio, their investment horizon and other factors that may influence their investment strategy. Lastly, it is crucial to acquire proper market experience before investing in such ETFs.
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Disclaimer: This information is added only for informative purposes and collected from different sources across the Internet. Digit Insurance is not promoting or recommending anything here. Please verify the information before making any decisions.
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