‘Single stock exposure is not that lucrative compared to a diversified fund’

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Sunday , March 30, 2008 at 0104 hrs Considering the way markets have been moving, it has become a tad important to employ an array of strategies to insulate at least one's principal amount. In fact, using an amalgamated strategy would not only result in discovering newer avenues but also enhancing one's possibilities of investing in stocks, which were difficult to invest in happier times. Rajiv Anand, head, investment at Standard Chartered Mutual Fund, in an interaction with Rajesh Naidu and Rahul Jain of The Financial Express elucidates the importance of different strategies, which could be used in these volatile markets.

According to you, what are the differences in arbitrage, contrarian, and defensive strategies?

One needs to be sure of one's goals before entering the markets. More importantly, before picking up a strategy and seeing through it, one needs to understand that whether it is beneficial to be in the trader zone or the investor zone.

Because on gauging these roles, one would get to know the events happening in the markets in a clear and distinct manner.

As regards the contrarian and defensive strategies, these are a part of long-term equity strategies, while arbitrage is a market neutral strategy, where the long equity positions are fully hedged against short positions in the futures market. It must be noted that a contrarian strategy involves investing in stocks that are out of favour in the market at any point in time, such that they may be available at lower valuations. And the basic principle one needs to understand is that though these stocks are out of favour, they are fundamentally strong and have the potential to demonstrate their growth in future.

Defensive stocks are those that do not get severely impacted in economic downturns and hence tend to have relatively stable sales and profits - for example consumer goods companies. So, it is the management of these strategies and adhering to it that forms the basis of lucrative and intelligent investment.

How would you explain to a retail investor about a defensive strategy in a mutual fund to be used in markets' volatilities?