A relentless decline in oil prices and sluggish Chinese economic growth adversely affected the broader markets so far this year. Additionally, weak domestic economic growth along with lackluster corporate earnings results dented investors’ confidence. The S&P 500 and the Dow had registered their biggest monthly losses last month since Aug 2015. Considering their drop from the earlier highs it seems that we are nearing a bear market.

Amid this broader downtrend, the stock market was subjected to gyrations. But what’s in it for active investors? It’s as simple as this – they should cash in on the persistent ups and downs and make money. And the best way to do so is to invest in trading-leveraged equity funds.

What Are Leveraged Funds?

Leveraged funds use borrowed money to increase returns in a short spell of time. For example, if an investor has a mutual fund worth $50,000, then he/she can borrow another $50,000 without utilizing his/her resources. If the value of the fund rises, the profit will be double. On the other hand, the investor will be accountable to creditors if the value goes down.

However, mutual funds are by nature highly liquid. So, if in a fund’s portfolio the proportion of debt to equity increases then the fund becomes less liquid. As per standard rule, the maximum amount of borrowed money a mutual fund can add to its portfolio is 33%. This means that if the value of the portfolio is $1 million then the maximum leverage for the fund will be $333,333.

Leveraged funds use derivative instruments such as options, futures and swaps to uplift performance. These funds generally strive to return a certain multiple of the short-term returns of an equity index. For example, a 2X S&P 500 fund aims to generate twice the returns that the S&P 500 manages to achieve. Leveraged funds are primarily marked “ultra”, “bull” or “2X”.

Benefits of Leveraged Funds

Leveraged funds not only help you making money by utilizing other people’s money but also offer benefits such as diversification. These funds help investors, especially with small investments, to invest in a diversified portfolio of assets in the capital markets. Diversification minimizes risk, while it escalates returns.