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 -

1. Ease of Tracking the Index

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.

2. High Returns Regardless of Investment

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.

3. Absence of Per-Trade Transaction Expense

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.

4. Cost-Effectiveness

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.

5. Diversification

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.

Some cons of leveraged funds are stated below -

• These funds do not exactly reflect the daily returns of the index they follow in the long run.
• The expanded daily returns may provoke abrupt losses in the short term. It may also result in a loss of the funds’ value.
• Certain leveraged ETFs are not likely to trade copiously, which restricts your capacity to sell or buy.
• As they use derivatives to amplify returns, these funds do not track the underlying benchmark carefully.

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.