Advantage Arbitrage

What is an equity and derivative fund? Is it suitable for conservative investors? —
Ritu Kapoor

An equity and derivative fund aims to take advantage of the arbitrage opportunities that exists between the cash and derivatives market. It generally buys into cash market and simultaneously sells futures. For example, once the fund locks into a position, it will make that return irrespective of whether the market goes up by 200 point or goes down. In the absence of arbitrage opportunities, these funds invest in debt and money market instruments. It is important to note that there is no direct exposure to equity for investors in these funds. Therefore, these could suit conservative investors who may be looking for a slightly better returns compared to a floating rate or a liquid fund. The risk, however, exists around the fund’s ability to find adequate arbitrage opportunities to generate reasonable returns on an on-going basis.

This article was originally published on May 31, 2011.