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.

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