The storm isn't here yet, but the lull seen in January has certainly given way to reasonably strong winds. In February, diversified equity schemes on an average generated a healthy 9.8 per cent absolute return, with its fund managers outperforming the benchmark indices, Nifty and Sensex, which gave 4.72 per cent and 4.59 per cent return respectively. Out of the 90 schemes considered in this category, 71 beat both the Sensex and the Nifty. Not every sector benefited, though. FMCG, the best performers in January riding on the appreciation in the FMCG index, went into negative territory this month. Balanced schemes on an average gave 4.64 per cent absolute return compared to negative 0.89 per cent return last month. A positive budget announced by the Finance Minister on the last day of the month did not just help the Sensex close at an (then) all time high of 6,713.86 points, but also brought smiles to the Indian mutual funds industry, since the budget opened the gates for the introduction of gold-linked exchange traded funds. Gold can now find its way in portfolios of small investors through the MF route. The introduction of Sec 88C also helps the MF industry as the investment limit of Rs 10,000 in Equity Linked Savings Schemes (ELSS) has been removed, and investors can now invest up to Rs 1,00,000. Debt funds also recovered and generated higher returns this month. The average annualised returns from income schemes moved up from around 4 per cent to 7 per cent, while MIPs moved from a negative territory to give 13 per cent simple annualised return.

How They Performed

Among diversified equity schemes, the low-profile SBI Funds Management continued to do well, with three of its schemes figuring in the toppers. SBI Magnum Sector Umbrella (Emerging Business) topped the list with 13.36 per cent absolute return against a negative return last month. It had a high exposure in the electronics and textile sector. Tax saving schemes this month on an average gave 6 per cent absolute return in the ELSS category, which was a good bit high compared to January. SBI Magnum Tax Gain topped with 12.83 per cent return, even though it has a relatively small fund size. Havell's India finds the highest allocation in the scheme at 8.3 per cent. Among sectoral funds, Reliance Diversified Power Fund was the runaway leader with 16.46 per cent return, way above its peers, none of whom could manage a double-digit return. The average return in this category was approximately 4.5 per cent. With a decent fund size, Reliance Diversified Power had the highest exposure in Siemens Ltd., while last month it was in Crompton Greaves.

Then, in the balanced funds category, Escorts Balanced retained top billing in February, with 49 per cent exposure in the equity segment and highest exposure in acc Ltd. Tata Balanced and HDFC Prudence remained marginally behind. Balanced schemes gave 4.64 per cent return on an average for the month. Compared to other categories, MIPs remained in favour since they generate higher returns with lesser risk. This time the topper was HDFC MIP LTP with 26.47 per cent simple annualised return. A sterling performance, given that the category average was almost half that at 13.55 per cent. HDFC MIP has 21 per cent exposure in equity and 65 per cent in debt. Finally, income funds gave 7 per cent annualised return on an average in February, but Grindlays dbf, with an average maturity of 201 days, managed to give double that at 14 per cent, which was a huge improvement from a low 3.15 per cent in January. Grindlays was followed by two UTI schemes.

The positives coming out of the month of February are expected to continue, if not improve further. With the budget giving the markets much cause to cheer, the outlook remains extremely positive. Mutual funds are able to continuously mobilise money in equity funds and have been net buyers. With new tailor-made products, such as derivative funds, coming up for investors, the good times are set to roll through the next month.

The Arbitrage Opportunity
Lay investors, with small sums of money, can now take advantage of arbitrage opportunities through mutual funds.

By Shilpa Nayak

In theory, arbitrage sounds simple. Buy stock of a company from one stock exchange and sell it in a different exchange or market (say, futures) where it is trading at a higher price, and you earn a profit. In practice, though, it's not so simple. Variations in stock prices in different exchanges or markets happen for very short periods of time (a couple of seconds), and for you to be able to spot it, and cash in on it, requires expertise, and sophisticated software. Then, the price difference is usually negligible, which means unless you are willing to put in huge sums of money, what you earn is not worth the effort, or the broker commission. All this time, therefore, arbitrage opportunities were provided by prominent brokers only to high net-worth clients.

Now, with mutual funds (MFs) entering the fray, the picture could change. On December 18, 2004, Benchmark mf launched Benchmark Derivative Fund, the first-ever arbitrage (derivative) fund in India. Sanjiv Shah, Executive Director, Benchmark mf, explains: "The idea is to generate market-neutral returns by exploiting the arbitrage opportunity in Indian capital markets." Globally, such funds are seen as an alternative to debt investments for investors who don't have the stomach to handle stock-market gyrations. According to Shah, investments for up to a year can mop up tidy returns. Investors appear to have taken up the cue, with Benchmark's fund having received Rs 51.79 crore of investor money as of January 31, 2005, and generated absolute returns of 0.64 per cent, which translates into annualised returns of 7.68 per cent, higher than what debt instruments routinely return.

Then, on February 4, 2005, JM Mutual launched its version of a derivate fund called JM Equity and Derivative Fund. Tagged an "income-oriented interval scheme", the fund "would generate returns by capturing MIS-pricing in the cash and the futures market", according to its fund manager Biren Mehta. Since the fund would take advantage of price differences in two markets, JM expects to yield around 7 per cent returns.

The only hitch with arbitrage could be that opportunities may dwindle in the event of a stock market crash. However, in such an eventuality, these derivative funds would invest their corpuses in money market instruments (such as government securities or t-bills), just like a normal liquid fund would, and generate 4-5 per cent returns, ensuring that you don't lose out totally. But given the current boom in the stock markets in India, a bearish phase seems an unlikely scenario, despite the interim corrections. So, go ahead, do your arbitrage.