Mutual fund queries

I intend to invest Rs 1 lakh in equity mutual funds. However, the current market levels make me a little nervous. Do you think I should wait for a correction or go ahead and invest since I want to invest for a long run? — Ramesh Talwar, Sion

First, let us address the issue of correction in the stock market. It is very difficult to predict as to when this liquidity driven rally is going to come to a halt. Moreover, considering that long-term prospects of the stock market look positive, timing the market may not be a great idea. In any case, market timing is a strategy which even experts find it difficult to practice with precision. For someone like you, who may be investing in equity funds for the first time and is not sure about the prospects of the stock market in the short-term, a Systematic Transfer Plan (STP), offered by mutual funds, could just be the right approach.

Through STP, you can transfer a fixed sum at a pre-determined interval, from a floating rate fund to an equity fund of the same mutual fund. In case you are not familiar, a floating rate fund is a debt oriented fund that invests in the instruments where the coupon rate is not fixed. Instead, the coupon rate is benchmarked against a market driven rate like the Mumbai Interbank Offer Rate (MIBOR). In other words, the coupon rate is adjusted to the benchmark rate.  The best thing about STP is that it allows you to enter into the equity market in a disciplined manner and that reduces the risk that one takes while trying to time the market by investing a lump sum.

Can you explain the concept of “equity and derivative fund”? Is it suitable for conservative investors? — Ritu Singh, Bandra

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. These funds are also called “market neutral funds” as there is no directional call. 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 are ideal for conservative investors who may be looking for a slightly better returns compared to a floating rate or a liquid fund. While there are concerns about these funds being able to find adequate arbitrage opportunities to generate reasonable returns on an on-going basis, ever expanding investible universe for cash futures will take care of this issue.

The author is CEO, Wiseinvest Advisors Pvt. Ltd. He may be reached at hrustagi@wiseinvestadvisors.com