Every investment guru will tell you that there are two emotions that rule the stock market: fear and greed.

When the market starts falling, everyone panics and sells out of fear. And when it is climbing, they greedily hold on to their shares and refuse to sell in case it goes higher and they lose out by selling at a lower rate.

Last weekend I attended a wedding and a teacher walks up to me and, as the conversation proceeded, asked me if I had any stock tips. And I could not help but wonder why someone who has never dabbled in the market would want to enter at such high levels.

Initially I figured it was greed but later realised it was fear. A different kind of fear: Fear of being left out of the rally. After all, the mentality goes, if others can make big bucks and if the rally still has some steam, why should I miss the bus?

It looks like Kotak's new fund wants to capitalise on this sentiment. The fund house aptly sums it up by saying: If you are in the market you run the risk of capital loss. But if you are out of the market, you run the risk of opportunity loss.

So the Kotak Twin Advantage Fund-Series II is an attempt to address this dilemma.

How does it work?

Quite interesting actually.

From the entire portfolio, around 80% will be invested in debt and money market investments. The balance will be invested in the market � not directly in stocks but in equity index options.

Here's where it gets a little technical. But don't give up, it's quite interesting and innovative.

Normally, a stock investor will analyse the fundamentals of the company before buying and then hope to benefit by compounded business growth leading to a substantial capital gain.

A trader, on the other hand, is not into the buy-and-hold mode. He wants to make money whether the stock is going up or down. Every climb and descent has potential for returns. Most traders rely on news, market information, research and technical analysis to make a decision.

Now here is where this fund goes off the beaten track. It will invest in Options but the decision will not be made based on sentiment or by a trader or fund manager. All the decisions will be generated by a mathematically based model developed by Kotak AMC.

Based on various parameters such as volatility (implied and historical), liquidity and trends, the system will generate its output. It will specify which Options must be bought and in what amounts.

Incidentally, there are various Index Options such as the Banking Index Option and IT Index Option. But due to lack of liquidity, the fund (as of now at least) would mainly participate only in Nifty Index Options.

Moreover, it will only be Call Options (not Put Options) since they plan to take advantage of the upside not downside. And, they will not sell options, only buy.

Is this reliable?

The perennial question indeed.

For such a product, the quality of back testing is extremely critical. Back testing is nothing but simulating the trading on historical data to determine the likely profitability and risk of the system.

Moreover, it should be done over a long period of time that encompasses bull and bear runs to verify the robustness of the model.

Kotak AMC has backtested with 16 years (September 1990 � March 2006) of Nifty data and worked with three-year rolling returns (since this is a three year close ended fund).

This period covered three bull and bear markets and also the current, fourth bull market.

A look at the results, for the Nifty and the scheme's simulated returns, is given below.

The worst case scenario

February 2000 � January 2003
The Nifty gave a negative return of �14% (CAGR) and �37% (absolute returns). Twin Advantage delivered a 4% (CAGR) and 12% (absolute) return.

The best case scenario

March 1991 � February 1994
The Nifty gave a return of 54% (CAGR) and 268% (absolute) while the Twin Advantage fund delivered a 75% (CAGR) and 439% (absolute) return.

The average return has been 14% CAGR.

And, the median participation in Nifty's upside was 92%. Participation means the fund's return as a percentage to equity index returns. So a 75% participation would mean that when Nifty value appreciates by 20%, the fund's NAV grows by 15% (75% of 20%).

These returns are post expenses and loads. Also, when looking at the returns, two assumptions have been made regarding the debt investments � a return of 8.4% per annum and no credit default.

Your call?

So there you are, the fund that attempts to give you an upside leverage when the market climbs and downside protection of capital when it dips. And based on their back testing data, they might well live up to their objective.

Like all equity funds, it does come with some amount of risk. But since just 20% would be allocated to Options, it does deserve a second thought. It caters to the sentiment that valuations are currently high (which does scare some investors) and the short term will witness in volatility and unpredictable liquidity. Yet, on the other hand, fundamentals continue to be sound and the India growth story is strong.

Being a close-ended fund, it means that you will not be able to buy the units anytime as in an open-ended fund. So, you can only buy units when the fund is open for subscription (till May 10, 2006).

If you do opt for this fund, then block your money for the time period required -- three years. They will open up for redemptions every quarter (25^th of March, June, September, December) but it is not advised. That's because the system has been designed and based on a three-year time frame. And the debt investments too will follow this time frame.

All the returns mentioned above pertain to investments held till maturity. Should you exit earlier, you may not get any capital appreciation.

Snapshot

Scheme: Close-ended debt scheme
Minimum investment: Rs 5,000
Price per unit: Rs 10
Entry load: Nil
Exit load: 2% (less than a year) 1.5% (1-2 years), 1% (after 2 years)
NFO period: April 17 � May 10, 2006
Benchmark Index: CRISIL MIP Blended Index
Fund Manager: Sajit Pisharodi, Ritesh Jain