The AMC board has approved changes to the features of the ‘go-anywhere-buy-anything fund’ so that covered call strategy can be pursued
Maverick fund-house PPFAS Asset Management, which manages PPFAS Mutual Fund, has announced approval to changes in features of its flagship Rs 4,500-crore Parag Parikh Long Term Equity Fund that will enable the multicap fund to write call options under covered call strategy from the middle of next month.
Actively managed MF schemes can write call options under the covered strategy for constituents stocks of Nifty 50 and Sensex subject to certain norms. A covered call is an options strategy that is utilised to produce income in the form of options premiums. To execute a covered call trade, an investor holding a long position in an asset writes (sells) call options on that same asset. Mutual funds can use a covered call strategy to hedge risks, translating to higher risk-adjusted returns if trades are successful. It must be mentioned that Parag Parikh Long Term Equity Fund is one of the first diversified equity schemes that from its very inception has used unique strategies including a generous allocation to overseas equities.
“The fund has received approval from the Securities and Exchange Board of India with regard to the insertion of the Writing of Covered Call Options Strategy in the scheme. In view of the above, it is proposed to insert the provisions with respect to the Writing of Covered Call Options Strategy in Scheme Information Documents of Parag Parikh Long Term Equity Fund of PPFAS Mutual Fund. This insertion tantamounts to change in the Fundamental Attribute of the scheme. Post completion of the Exit Option Period, these changes will be effected in the Scheme Information Documents w.e.f. 14th October 2020,” the fund, managed by Rajeev Thakkar and Raunak Onkar, has informed investors in a communique.
While the covered call approach can deliver downside protection to the extent of premium collected, generate extra returns in the form of option premium in a range-bound market if & when the strategy plays out, it has a flip side too. “In such an investment strategy, the profits from the call option writing is capped at the option premium, however, the downside depends upon the increase in the value of the underlying equity shares. This downside risk is reduced only to the extent of the premium received by writing covered call options,” the fund has informed.
Since Parag Parikh Long Term Equity Fund may write covered call options only in the case it has an adequate underlying number of shares as regulatory norms, engaging in a covered call strategy would lead to setting aside a portion of investment in underlying equity shares. “If covered call options are sold to the maximum extent allowed by the regulatory authority, the scheme may not be able to sell the underlying equity shares immediately if the view changes to sell and exit the stock. The covered call options need to be unwound before the stock positions can be liquidated,” the fund has said.
Also, increased volatility in the market may result in higher premiums and marked to market losses in NAV for all the existing short positions even at the same price of the underlying stock. Please note the risks from the covered call strategy will just not be for normal unitholders, but also for the Rs 156 crore worth ‘insider holdings’ in the fund.
In view of the fact that engaging in covered calls strategy can be deemed as a change in fundamental attributes of Parag Parikh Long Term Equity Fund, the existing unitholders have been given an optional offer to redeem or switch within 30 days exit period starting September 14 till October 13.
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