SOME equity funds, using a mix of debt and equity derivatives strategies, endeavor to keep the investors stay invested by providing long-term returns similar to the market, but with much lower volatility.
In essence, the endeavor is to move towards a 'zero heart attack' investment scheme, wherein the investor is not subject to the discomfort posed by existing equity investment options, which tend to be volatile.
Such low volatility, or absolute return, funds try to achieve their objectives through active management of volatility and risk by investing across multiple independent and uncorrelated strategies.
There are only a few schemes available to retail investors that use such a multi-strategy approach to investing in India.
For example, a multistrategy approach could involve debt and arbitrage, playing on corporate events or simple hedging strategies. In the first, debt and debt-like investments help in making non-volatile profit and provide a stable base of returns.
The second strategy focuses on corporate events such as mergers, open offers or IPOs to enhance the performance of the fund.
Such corporate events are sporadic and these funds take advantage of them when available.
Such offers provide a great way to give the fund an edge over its peers over a reasonable period.
Hedging strategies consist of a long equity investment options, which tend to be volatile.
Such low volatility, or absolute return, funds try to achieve their objectives through active management of volatility and risk by investing across multiple independent and uncorrelated strategies.
There are only a few schemes available to retail investors that use such a multi-strategy approach to investing in India.
For example, a multistrategy approach could involve debt and arbitrage, playing on corporate events or simple hedging strategies. In the first, debt and debt-like investments help in making non-volatile profit and provide a stable base of returns.
The second strategy focuses on corporate events such as mergers, open offers or IPOs to enhance the performance of the fund.
Such corporate events are sporadic and these funds take advantage of them when available.
Such offers provide a great way to give the fund an edge over its peers over a reasonable period.
Hedging strategies consist of a long only portfolio with a hedge overlay. The long-only portfolio provides alpha over the market, while the hedge helps to manage exposure and reduce volatility.
Due to the presence of arbitrage positions as well as a Nifty hedge, long-term average market exposure of such a fund is relatively low at 25 to 30 per cent, with a peak of 50 per cent.
The market exposure of the fund keeps varying on a day-to-day basis, based on various parameters such as advance-decline ratio and volatility.
This can help the fund stay in line with its promise of providing consistent uncorrelated returns and protect investor's capital in situations like the ones we saw in January 2010, May 2010 and January 2011 when equity markets were falling.
Investors can use such funds from various perspectives. People who are averse to the risk of pure equity products can use these as a core component of a portfolio that seeks returns higher than debt.
Investors whose risk profile or funding needs do not permit too much of capital erosion would find these funds perfectly fitting into their portfolio.
These funds can also be used as a platform to invest a lumpsum in equity markets at a single point, without worrying about the prevailing market level.
In addition, as these funds fall under the equity taxation regime, the effective tax rates are lower than those of debt and MIPs.
on various parameters such as advance-decline ratio and volatility.
This can help the fund stay in line with its promise of providing consistent uncorrelated returns and protect investor's capital in situations like the ones we saw in January 2010, May 2010 and January 2011 when equity markets were falling.
Investors can use such funds from various perspectives. People who are averse to the risk of pure equity products can use these as a core component of a portfolio that seeks returns higher than debt.
Investors whose risk profile or funding needs do not permit too much of capital erosion would find these funds perfectly fitting into their portfolio.
These funds can also be used as a platform to invest a lumpsum in equity markets at a single point, without worrying about the prevailing market level.
In addition, as these funds fall under the equity taxation regime, the effective tax rates are lower than those of debt and MIPs.
