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SIP holds steady, arbitrage funds gain in volatile equity markets

Saikat Neogi

As investors turned risk-averse because of the volatility in the markets and the uncertainty related to the general elections, net equity inflows including equity-linked savings schemes declined to a 31-month low of Rs 4,608 crore in April or down 42% as compare with inflows of Rs 9,014 crore in March this year.

Interestingly, despite the drop in overall equity inflows, retail participation remained strong as Systematic Investment Plans (SIPs) reported inflows of Rs 8,238 crore in April as compared with Rs 8,055 crore in March. In fact, the net equity inflows of Rs 4,608 in April despite the inflows of Rs 8,238 crore through SIPs clearly suggest that there is a selling pressure from the HNIs in the funds.

Balanced funds, large-cap lose steam

The most preferred investment option, the large cap funds along with large-cap and mid-cap funds, have managed to garner just Rs 28 crore, which is a clear indication that there is a shift in investment focus. Small-cap funds garnered net inflows of Rs 956 crore and sectoral/thematic funds saw net inflows of Rs 567 crore.

In April, balanced funds have seen net outflows of Rs 2,121 crore because of poor returns and untimely dividends, which have forced investors to take out money from these funds. Multi-cap funds remain investors’ favourite with net inflows clocking Rs 1,873 crore in April.

SIP stay steady

Data from Association of Mutual Funds in India (Amfi) show that SIP folios stood at 2.62 crore in March this year as compared with 2.11 crore in the same month last year, clearly showing that investors are willing to invest a fixed sum regularly regardless of the net asset value or market level. Analysts say investing lumpsum money in funds at a time when the markets are volatile and uncertainty related to the general elections looms is not advisable.

However, SIPs are ideal as more units are purchased when a scheme s net asset value (NAV) is low and fewer units when the NAV is high. When the two situations are analysed together, the cost is averaged out and, the longer the time-frame of the investment, the larger will be the benefits of averaging. Moreover, SIPs have the advantage of compounding one must start investing at an early age as longer the investment horizon, the bigger the benefits. If you start early, equity funds should constitute around 80% of portfolio as this asset class has been found to be the best bet for growing money over the long-term.

Also, investors who are wanting to invest in stocks directly can look at stock SIPs which are offered by brokerage houses. However, such investments are usually done by those who have knowledge on stock markets as they have to shortlist the stocks themselves and invest.

Arbitrage funds gain

Fund houses reported huge inflows in arbitrage funds which reported net inflows of Rs 1,529 crore in April. Arbitrage funds leverage the price differential between equity shares in the cash market and in the stock futures market. They usually generate returns by harnessing the price differential between the two as they buy in the cash market and sell in the futures market.

In fact, in the last two months arbitrage funds have become a favourite with risk-taking investors after the market regulator last month made it mandatory that all debt securities with maturities beyond 30 days will be subject to daily mark-to-market. Typically, the price of a stock in the derivatives market quotes at a premium to its price in the cash market. In fact, this allows for an arbitrage opportunity which such funds attempt to encash by buying a stock in the cash market and selling it in the futures market, thereby earning the differential premium between the two prices.

Also, in volatile markets, the returns on arbitrage funds are high. Experts say arbitrage funds can be a good substitute for savings accounts, ultra-short term and short term debt funds for a horizon of six to 12 months because of liquidity provisions and higher returns.