Firms Devise Lucrative Opportunities for NRIs

Fund managers and designers of financial products are getting increasingly
creative when it comes to offering fruitful and safe options during
the present times of economic turmoil. Two such recent initiatives aimed
at non-resident Indians are UTI Mutual Fund’s Wealth Builder Fund Series
II and ICICI Direct’s launch of online Futures and Options (F&O)
trading service for Indians in the Gulf.

The UTI product offers overseas Indian investors an opportunity to
gain from combined strengths of equities and gold to build a long-term
diversified portfolio, according to company officials. The new fund
is aimed at long-term capital appreciation through investment predominantly
in a diversified portfolio of equity and equity-related instruments
along with investments in gold exchange traded funds (ETFs) and debt
and money market instruments.

According to Fund Manager and vice-president of UTI AMC, Harsha Upadhyay,
this product has been built keeping in mind the market uncertainties.
At such times, investors need genuinely ‘counter cyclical’ or low-correlated
asset classes that they can add to their portfolios. Gold is one asset
that is counter-cyclical in nature and hence an ideal asset for use
in portfolio diversification.

"If one of your primary objectives is to earn positive investment
returns while having a low probability of incurring losses in a reasonable
timeframe, one must (also) look for asset classes that behave differently
in diverse economic cycles," he was quoted as having said at the
launch of the new fund.

The fund takes gold exposure through gold ETFs, which give an investor
the advantages of investing in gold while eliminating drawbacks of physical
gold such as storage cost, liquidity issues and concerns over purity
and safety. The fund is an open-ended equity-oriented scheme and the
units will be sold at face value of Rs.10, plus load as applicable,
in the new fund offer period. The minimum initial investment amount
is Rs.5,000 and in multiples of Rs1 under the regular plan, and Rs10
million and in multiples of Rs1 under the institutional plan. The issue
closes on November 19.

Meanwhile, ICICIdirect.com, a major online trading platform in India,
recently launched its online Futures and Options (F&O) trading service
for non-resident Indians in the Gulf. This facility offers secure transactions
through its integrated trading site.

It provides the opportunity for NRI customers to create short-term
trading positions and benefit from market volatility. F&O can act
as a tool for risk management and hedging by reducing potential downside.

F&Os are critical financial instruments for risk management as
these allow risks to be separated and more precisely controlled from
volatile and uncertain situations. The company said it would provide
training in trading to NRI customers at various overseas locations.
Non Resident Indians including – NRIs, PIOs & OCIs can trade in
Derivatives Segment out of the Rupee funds held in India on non-repatriable
basis (NRO). This means they can trade futures & options in the
Indian stock market.

Futures and options represent two of the most common form of "Derivatives".
Derivatives are financial instruments that derive their value from an
‘underlying’. The underlying can be a stock issued by a company, a currency,
Gold etc. The derivative instrument can be traded independently of the
underlying asset.

A ‘Future’ is a contract to buy or sell the underlying asset for a
specific price at a pre-determined time. If you buy a futures contract,
it means that you promise to pay the price of the asset at a specified
time. If you sell a future, you effectively make a promise to transfer
the asset to the buyer of the future at a specified price at a particular
time. Every futures contract has the following features: Options contracts
are instruments that give the holder of the instrument the right to
buy or sell the underlying asset at a predetermined price. An option
can be a ‘call’ option or a ‘put’ option.

A call option gives the buyer, the right to buy the asset at a given
price. This ‘given price’ is called ‘strike price’. It should be noted
that while the holder of the call option has a right to demand sale
of asset from the seller, the seller has only the obligation and not
the right. For eg: if the buyer wants to buy the asset, the seller has
to sell it. He does not have a right. So in any options contract, the
right to exercise the option is vested with the buyer of the contract.
The seller of the contract has only the obligation and no right. As
the seller of the contract bears the obligation, he is paid a price
called as ‘premium’. Therefore the price that is paid for buying an
option contract is called as premium.