Nifty 50 PR 2x Leverage Index.
Nifty 50 Price Returns 2x Leverage Index is designed to generate multiple time return of the underlying index, Nifty 50.
- NIFTY50 PR 2x Leverage Index seeks twice the index return on a daily basis.
- Index is designed to provide magnified exposure to NIFTY 50 PR Index value.
Leveraged products are mutual funds, ETFs (exchange-traded funds) and ETNs (exchange-traded notes) which typically use derivatives to deliver some multiple of an index’s daily returns (positive or negative), of the underlying index.
Consider the following example:
A Nifty 50 PR 2x Leverage Index fund would seek to double the daily return of the NIFTY 50.
Therefore, if the Nifty 50 closed up 5 percent, the fund would seek to return 10 percent. Conversely, if the Nifty 50 were to close down 5 percent, the value of the fund could decrease by 10 percent.
Performance:
Since these products deliver some multiple of an index’s returns on a daily basis, they must reset the amount of leveraged or inverse exposure they have each day. This daily reset means that the products will not always deliver their expected multiple.
Uninformed investors might assume that the leverage returns are generated on a continuous basis, so that if an underlying index is up 5% for a month. That is absolutely not the case.
Check how the performance of a 2x ETF would be, if the index moves up and down in a volatile market:
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| source:fidelity |
Simply stated, there is a compounding effect associated with the daily resets which makes the performance unpredictable if the product is held longer than one day.
Such products will do better if the markets trend steadily in one direction without big reversals, but we all know that is not the case so.
Are there any Mutual Funds or ETFs available for Nifty 50 PR 2x leverage index?
As of now, leveraged ETFs are not permitted in India, but may be allowed quite soon.
There is Fubon Nifty 2X Leveraged Index ETF traded in Taiwan Stock Exchange and Mirae ETF in Korean Stock Exchange.
Conclusion:
It is important to remember that these products are generally designed for daily/very short-term use only, and are not buy-and-hold. These funds are not appropriate for most investors.
For professional investors, leveraged ETFs are useful in short-term tactical strategies and for use as short-term hedges. For individual investors/traders, leveraged ETFs are alluring, because of the potential for higher returns.
As with all investments, it is important to read the prospectus and fully understand the product’s investment objectives, investment strategies, risks and costs.