Readings: No load funds, Selling put options, IPO / M&A ranking
. . . mutual funds are ‘product manufacturers’ who manage the money, why should they cry? The reason is simple: their 7-digit bonuses are dependent upon the distributor-based business model. It works something like this.
Last year, the industry saw more than Rs 89,000 crore of equity schemes being sold, of which a little over Rs 22,000 crore came in as NFOs. Based on the assumptions above, the distributors took home about Rs 2,800 crore — Rs 1,500 crore from existing schemes and Rs 1,300 crore from NFOs.
The Rs 89,000 crore of new funds the AMCs got to manage would have earned the industry Rs 1,780 crore of new money, 30 per cent of which would be Rs 530 crore, of which Rs 5-25 crore would have gone into the pockets of executives as bonus.
Not an insubstantial sum, if investors switch to no-loads.
It comes down to this: your incentives are NOT aligned with those of the MF.
In the May 2004 version of his paper entitled “Why are Put Options So Expensive?”, Oleg Bondarenko confirms large returns for shorting puts options on a broad market index . . .
- Selling put options makes a small profit most of the time (when markets are steady or rising), but takes a big loss once in a while (when markets crash).
- Systematically selling one-month-to-expiration, unhedged index puts generates extraordinary profits: 39% (95%) per month for at-the-money (deep out-of-the-money) puts.
- For buyers of at-the-money puts to break even, October 1987-like crashes would have to occur 1.3 times per year.
- Business Standard: India ranks 2nd in IPO, 4th in M&As
121 Indian firms mobilised $23.96 billion, while there were 697 M&A deals worth $41 billion.
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