Mutual Strain

One of our readers, Binay Bist, reflects on the state of the mutual fund industry

I had made a New Year resolution that I will refrain from commenting on the penguins from the mutual fund (MF) industry. But the juvenile antics of the Securities and Exchange Board of India (SEBI) and the fund houses were enough provocation to breach my commitment. Consider the following events:

1. Banks...

Premium Content
Monthly Digital Access

Subscribe

Already A Subscriber?
Login
Yearly Digital Access

Subscribe

Moneylife Magazine Subscriber or MAS member?
Login

Yearly Subscriber Login

Enter the mail id that you want to use & click on Go. We will send you a link to your email for verficiation
The gimmick called arbitrage funds

Over the past two years, the markets have been hugely volatile— which is ideal for arbitrage funds. But over this period, of the 12 arbitrage funds, only three funds outperformed and nine underperformed their benchmarks

Fund companies push arbitrage funds as one of the best options in a volatile market environment for those investors who wish to invest in a low-risk portfolio and yet gain decent returns. Theoretically, these funds benefit from the arbitrage opportunities arising out of price differences between the equity and derivatives segment of the stock market. So, these funds should do well when the market is volatile. But as is usual with mutual funds, the reality is different. Or rather, as with any other mutual fund product, the reality is simple: like all other funds, arbitrage funds also make money mainly when the market is rallying for a while. Volatility kills them!

What else explains the following facts? In the past two years, the Indian markets have remained highly volatile as it saw a bull run as well as a bear run. Arbitrage funds should have done extremely well in this period. If we look at the past two years’ performance of 12 arbitrage funds, it was terrible—only three funds outperformed and nine underperformed. Over three years, out of a total of nine funds, five funds outperformed while the others underperformed—an outcome akin to the toss of a coin. The performance of the 15 funds that were available over the past one year is hardly surprising, either; seven funds outperformed and eight underperformed. Again, the outcome of a coin toss.

So, what is so great about arbitrage funds? They are just another marketing gimmick of a complicated product. Over the past one year, most of these funds have given a return of 4%. A bank fixed deposit for a period of one year gives a return of 6%. The performance of these funds over the period of six months and three months were pathetic. Their returns were just 1%-2%.
 

Like this story? Get our top stories by email.

User

COMMENTS

B V Vijaya

9 years ago

Nacked truth has been revealed. When these schemes were launched I thought that as an adviser this fund could be added to give stability to portfolio & increase the confidence of investor in equity investments. After 2 years the result is not good.At the moment it has added a category of fund having no results

Best Fund Houses

Our new, improved methodology ranks 18 fund houses based on their five-year performance and suggests how to use the scoring

The commonest approach to ranking funds is to choose from the recent top performers. However, as Moneylife has proved several times, many funds do well for a brief period (called winning streaks) and then start slipping. You can choose your time period but any...

Premium Content
Monthly Digital Access

Subscribe

Already A Subscriber?
Login
Yearly Digital Access

Subscribe

Moneylife Magazine Subscriber or MAS member?
Login

Yearly Subscriber Login

Enter the mail id that you want to use & click on Go. We will send you a link to your email for verficiation

We are listening!

Solve the equation and enter in the Captcha field.
  Loading...
Close

To continue


Please
Sign Up or Sign In
with

Email
Close

To continue


Please
Sign Up or Sign In
with

Email

BUY NOW

online financial advisory
Pathbreakers
Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
online financia advisory
The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Online Magazine
Fiercely independent and pro-consumer information on personal finance
financial magazines online
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
financial magazines in india
MAS: Complete Online Financial Advisory
(Includes Moneylife Online Magazine)