Financial Daily from THE HINDU group of publications
Monday, Jul 04, 2005
Columns - Mutual Confidence
Funds readying to test arbitrage concept
UTI Mutual Fund, the No 1 player in the asset management space, is seriously looking at what is quickly emerging as the next happy hunting grounds for fund houses - arbitrage. It will soon join the league of players, including JM Mutual Fund and Prudential ICICI MF, which have come out with arbitrage products in recent times.
UTI MF, like a few others before it, is mounting a conscious effort to build investors' opinion around the concept. Mr D.S.R. Murthy, Executive Director, has lately explained it in a few simple lines, complete with illustrations. He has also hinted that UTI MF will soon add an arbitrage fund to its suite of products.
For those who are considering an investment in arbitrage funds, here is ready reckoner, courtesy Mr Murthy's communiqué on the subject. At the heart of it lies the price difference between the spot and futures markets. It also cites the example of a fund manager who, on April 30, buys 10,000 shares of Company A at Rs 145.30 per share in the cash market. Simultaneously, the fund manager gets into a futures contract for May to sell 10,000 shares of Company A at Rs 146.50. The entire investment is thus hedged. And, if he maintains his position till expiry (and on the date of expiry, settles the futures position), he notches up an annualised return of about 9.9 per cent, not considering expenses and taxes.
It remains to be seen how investors react to arbitrage funds and what the fund managers concerned actually deliver over time. All said and done, this is indeed turning out to be a distinct product category. If the number of offer documents being sent to SEBI for clearance is any indication, the prospect of encashing on arbitrage opportunities has already attracted several new players. Among them are HDFC Mutual Fund and DSP Merrill Lynch Mutual Fund.
To put it in plain words, hedging is a way of reducing risk of loss caused by price fluctuations of securities held in a portfolio. It involves buying and selling of equal quantities of a security in two different markets with the expectation that a future change in price in one market will be offset by an opposite change in the other. One of the markets is usually cash or spot, while the other is derivatives.
In the midst of all this, UTI Mutual Fund is doing some straight talking too. Mr Murthy, for instance, is clearly saying that hedging will not lead to a total elimination of risk. With reference to his own example, he adds that if the spot price of Company A is more than the futures contract price on the date of expiry, the fund manager will actually incur loss. "He needs to take correct positions in the market," is what the UTI MF ED has observed.
"Today such price differences have become huge opportunities for generating returns from equity without taking the risks involved in equity investments. The returns are also generally better than what a liquid fund or a floating rate fund would generate," it is pointed out.
Based on your personal financial situation and risk tolerance, you must determine an investment amount, however small, that you will compulsorily put into your SIP.
Sashi Krishnan, CEO, Chola Mutual Fund
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