What should investors in Arbitrage Fund do amid stock market uncertainties, high interest rate regime? Get 6 top tips on MF diversification

Arbitrage Fund category is witnessing a lot of movement in the Hybrid Fund segment. In June, the net outflows for this fund category stood at Rs 5,593.30 cr. Outflows were seen even in March (-Rs 6,796.56 cr) and February (Rs -335.91 cr). In May, April and January, Arbitrage Funds saw net inflows of Rs 1,007.37, Rs 4,092.80 and Rs 954.98 cr respectively.

What are the prospects for this category of Mutual Funds and what strategy must investors having already invested in these funds or those planning to make a move, adopt? Roopali Prabhu, Chief Investment Officer (CIO) and Co-head of Products & Solutions, Sanctum Wealth has some useful tips for consideration.

“Arbitrage funds are meant for parking surplus liquidity in a tax efficient manner. The returns tend to track closer to liquid funds returns with some temporary deviation on either side. We continue to think the category remain relevant in this space with an ideal investment horizon of 3-6 months,” Prabhu said.

It was in response to a question whether it was a good idea to invest in Arbitrage Funds even as we face stock market uncertainties and a higher interest rate regime staring us.

“Quarter end redemptions in the arbitrage funds seem to be a trend and flows back into the funds at the beginning of the quarter. It is difficult to attribute to an exact cause but it could be due to the liquidity needs of corporate investors into these funds,” she said.

Hybrid Funds witnessed net outflows of Rs 2,279.45 cr in June, which was a departure from a three-month trend of positive inflows. In March net inflows, were to the tune of Rs 3600 cr which jumped two-fold to Rs 7200 cr in April and to Rs 5100 cr in May.

Over the last six months, barring March and June, the hybrid funds have seen inflows.

Decoding the pattern, the CIO said that most of the action in the Hybrid Fund segment has been owing to the movement in the arbitrage fund category.

On categories in Hybrid Funds that have potential to give good returns to investors, Prabhu said that different categories address different problem statements and hence cannot be compared.

“Choosing investment products with one’s personal investment objective is most important. For example: Balanced advantage funds would suit investors that have moderate risk appetite and do not / cannot make asset allocation decisions on their own,” she further said.

Her advice to investors who tend to have a large equity allocation is to be mindful of the potential volatility too.

Prabhu’s top tips to investors looking to diversify their mutual fund portfolio: If they have Rs 100 and are looking for the right categories to invest in:

1) (Diversification) Would primarily depend on investment objective, time horizon and risk appetite but for a moderate investors with a 3-5 year horizon we recommend a mix of debt funds, equity funds, international funds and some exposure to Gold.

2) In the fixed income category we do like target maturity funds with roughly 5-6 year residual maturity that invest in government securities.

3) At this point in time, we are not allocating to corporate bonds funds considering in many pockets the returns are not adequate for the risk.

4) In case of equities, we predominantly use efficient index funds for our large cap allocation.  We are allocated about 25% of the overall portfolio in flexicap funds including one smart beta fund. We have a 5% allocation to a midcap fund. Considering flexicap funds also allocate to mid and small cap companies, the overall mid/small allocation would be higher.

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5) We are firm believers of international diversification and this does not mean only the US. In fact we are underweight US and have exposure to China, Japan amongst a few other funds. 

6) Finally, we use Gold ETFs as a proxy to alternate investments. Gold tends to cushion the portfolio during volatile times and hence we consider it an important component.

“We cannot emphasise enough that investments should be in line with personal objectives rather than chasing returns,” she said.

(Disclaimer: The views/suggestions/advises expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)