Initially, mutual funds allowed investing only in bullish markets. At that time, investors were able to purchase mutual funds and profit if the price of stocks from the fund's portfolio moved upward. The introduction of mutual funds that track the performance of indexes have brought a new wave of interest in trading mutual funds. Index tracking mutual funds have become popular very quickly. The high popularity of index funds has pushed exchanges to introduce mutual funds that track the inverse performance of indexes or other stocks.
The nature of inverse mutual funds is that their value grows when the benchmark index (stock) price declines. Inverse mutual funds are also known as Bear mutual funds, since inverse mutual funds profit buyers in bear markets.
Like the majority of mutual funds, the Bear (inverse) Funds invest in a broadly diversified portfolio of securities. The difference is that, unlike traditional bullish funds, the Bear funds, in addition to buying stocks and other securities, are also involved in "short sales," buying "put" options and selling "call" options. A portfolio manager, who sells a stock short, buys a put option or sells a call option, profits when the stock goes down. The Bear fund may also hold short positions on indexes that act as proxies for the stock market or a segment of the market. If the fund's portfolio is constructed with more "short" than "long" positions and the fund's portfolio allows the fund to benefit from a steep market decline, the fund is called a Bear fund.
The Rydex Venture 100 Fund (RYVNX) and Rydex S&P 500 Inverse Fund (RYTPX) are examples of bear funds that track the inverse performance of the NASDAQ 100 and S&P 500 indexes respectively. Furthermore, a trader who invests in these funds expects the NASDAQ 100 and S&P 500 indexes to move down.
By V. K. for MarketVolume.com