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What should you do now?

There are opportunities that you can still tap. Here are some tips that will help you weather the current economic storm, says Narayan Krishnamurthy.

Narayan Krishnamurthy | Print Edition: December 11, 2008

We have looked at what started the current crisis in the mutual fund space and what you, the investor, can do to minimise the fallout of unfortunate mergers or an unfavourable economic climate. We now take a look at what opportunities exist for you in the current environment.

Arbitrage all the way: Arbitrage funds could be your best bet. These funds buy low from one market and sell high in another. Fund managers use computers to capture arbitrage opportunities that may exist even for a few seconds. Typically, they buy stocks in the spot market and sell them at the same time in the futures market. At the time of delivery, they profit from the spread in the futures-spot market. Dividend declaration, buybacks, mergers or de-mergers also provide arbitrage opportunities in the futures-options markets. Of the 14 funds in this category, none has given negative returns. This year, arbitrage funds have outperformed both the Sensex and the equity diversified category by over 40%.

Gilt glitters: There is no credit or default risk with gilts as they are backed by sovereign guarantee. But just because gilts are called ‘safe’ does not mean that you never lose. The truth is that gilt prices can, and do, fluctuate. Interest rates are the biggest influence on a government securities’ stock price. Assume that a 10-year government paper bears an interest rate of 10%. If you invest Rs 1 lakh, you will get an annual interest of Rs 10,000. When interest rates come down, say to 8%, the market value of the security will realign to the new interest rate.

And finally, here’s what you should do now:
• Re-assess your risk appetite with the fund’s risk grade and then alter your investment.
• Continue investing in SIPs as averaging works best over complete market cycles.
• Redeem your investments only if necessary. Redemption at this point may translate into heavy losses.

ARBITRAGE FUNDS: SHOCK ABSORBERS
SCHEME NAME
NAV (RS)6-MONTH (%)1-YEAR (%)
ICICI Pru Equity & Deriv-Income Optimis (D)10.33.213.6
UTI-SPREAD Fund (G)12.34.69.4
JM Arbitrage Advantage Fund (G)12.14.28.6
Lotus India Arbitrage Fund (G)11.43.88.4
ICICI Pru Blended-Plan B (G)12.93.78.4
ICICI Pru Blended-Plan A (G)13.23.78.3
HDFC Arbitrage Fund (G)10.93.88.3
SBI Arbitrage Opportunities Fund (G)11.93.88
Kotak Equity Arbitrage Fund (Div-M)10.73.87.9
ICICI Pru Equity & Deriv-Income Optimis (G)11.83.27.7
Six-month and one-year returns of the funds; funds ranked on the basis of one-year returns 
TO REDEEM OR NOT?
What the value of Rs 10,000 would have been if you had invested the money in the following funds on 5 Jan 2007.
SCHEME NAME16 AUG ‘07
8 JAN ‘08
19 NOV ‘08
Birla Sun Life Dividend Yield Plus (G)
10,80015,4197,926
UTI-MNC Fund (G)10,51713,1117,129
Kotak Opportunities (G)10,91519,2247,415
Franklin India Prima Fund (G)10,07814,4325,088
Tata Equity P/E Fund (G)
11,746
18,2327,473

• If you don’t need the money urgently, do not redeem your investment now. The NAVs of most funds have fallen substantially since January 2008.

• Redemptions at this juncture would mean heavy losses. The value of Rs 10,000 invested in Franklin India Prima in January 2007 is now just half that amount.

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