ICICI Prudential Derivatives Succeeds In Converting High Volatility In Equity Mkt

Mumbai: Buy low, sell high. With this strategy, ICICI-Prudential's Equity and Derivatives Fund Wealth Optimizer Plan has succeeded in converting the high volatility in the equity markets to its advantage. This strategy has assisted the fund to act like a parachute in a falling market. On the flipside, however, the fund will under perform the benchmark indices in a fast-rising market. When the benchmark indices fell 15 per cent in the February-March period this year, the fund's damage was limited to 5.8 per cent.
Currently, the Sensex is over 15,000-mark and the hedge ratio is 30 per cent, which is the maximum it has hedged since its launch. The fund has been altering the hedge ratio at different market levels. Hedge ratio is decreased in an attractive market to capture the upside and it is enhanced in an expensive market to protect the downside. The hedge ratio is based on a mix of quantitative and qualitative factors such as forward P/E ratio of the index, risk-free rate of return, equity risk premium and even market sentiments.

Equity & Derivatives Fund by ICICI Prudential was one of the first derivatives-based mutual funds which hit the market after the Sebi permitted fund houses to use derivatives for hedging against risk and portfolio rebalancing, last year. Under the rules, fund houses can hedge for potential losses from cash positions by derivatives products. The scheme, which collected Rs 1,140 crore via its new fund offer (NFO) last December, has grown to Rs 1,181 crore now. The ICICI-Pru scheme, which is benchmarked against Crisil Balanced FundIndex, also applies the golden rule of selecting stocks which have strong fundamentals.