Kotak Mahindra Mutual Fund has launched a novel product combining debt and stock options. Christened Kotak Twin Advantage Fund-Series II, this scheme would invest 75 to 100 per cent in debt and money market instruments and 0 to 25 per cent in equity index options to generate income.

The scheme would give investors an opportunity to tap the potentials of equity market with risk controlled participation.

Options include derivatives products which allow investors to benefit from an upmove or downmove while limiting the losses.

There are two kinds of options, Call and Put. Call Option contracts give the owner the right, but not the obligation, to buy a specified amount of an underlying shares at a specified price within a specified time.

This is the opposite of a Put Option, which gives the holder the right to sell shares.

A Put Option becomes more valuable as the price of the underlying stock depreciates relative to the strike price while a Call Option makes money when the underlying shares appreciates compared to the strike price.

Kotak Twin Advantage is a close-ended debt scheme with no entry load. Nilesh Shah, president, Kotak Mahindra Asset Management Company, said, "As markets are trading at an all time high, valuations as reflected by P/E are higher than their long-term average. But fundamentals continue to be strong. Hence a lot of investors are contemplating to participate in equity markets."

Going by valuations, investors are concerned about the downside protection, but at the same time they do not want to miss out the upside potential which is where Kotak Twin Advantage Fund-Series II helps, he added, calling it "an innovative product meant for investors who strongly believe in the potential of equity markets."

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