Arbitrage Funds

The market is very volatile at present and NAVs have sky rocketed in a short span of time. I am a first-time investor and can take moderate risk. Is there any good equity fund which can take care of a severe correction in the near to medium future? I want to invest in safe funds.
-Shankar

Arbitrage funds are an option you can consider at this time. If you are looking at a low-risk portfolio, you could consider investing a major part of your portfolio in such funds. These funds try to capitalise on the arbitrage opportunities arising out of pricing mismatch of stocks in the equity and derivative (Futures and Options) segment of the stock market. They are an ideal way to get a decent return with moderate amount of risk. Funds like JM Arbitrage and SBI Arbitrage Opportunities have generated return in excess of 9 per cent in the past one year (as on December 19, 2007). You can enter these funds anytime and not worry where the market is headed. Since these funds invest predominantly in equities, they are treated like equity-oriented mutual funds and have the identical tax treatment. They attract a lower short-term capital gain tax of 10 per cent and become completely tax free if you hold them for a period exceeding one year.

Simultaneously, you can consider opting for some balanced funds. Balanced funds have significant exposure to debt, which makes them less aggressive when compared to a pure equity fund. You can consider five- or four-star rated balanced funds like HDFC Prudence, TATA Balanced or DSP ML Balanced for this purpose. Ideally, invest in these funds via a systematic investment plan(SIP) so that you are able to average out the cost of your purchase.