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

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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?

Stocks that do well in an economic upturn are the pro-cyclical stocks or those that have strong future growth potential. However, these are also stocks that get most impacted when there is a change in the economic cycle. Therefore, when there are concerns about slowdown in growth, defensive strategies tend to out-perform, as the market gives higher value to existing stable cash flows as compared to uncertain future cash flows. Such strategies have been popularised in the western markets but are not very active in India.

Could you explain how arbitrage funds work, due to which they have delivered positive returns over the last three months?

Arbitrage funds do not take a directional position in the equity markets. They are fully hedged at all times and hence returns are not impacted by the swings of the equity market. These funds depend on the difference in price between cash and future markets. Hence, one needs to keep a tab of both the cash and the futures market, so as to cash in on any opportunity that exists in the markets’ volatilities.

Considering the advantages involved in defensive strategy, what would you recommend? Investing in defensive stocks or a thematic fund? For example, investing in ITC would be lucrative or in a FMCG mutual fund?

Evaluating the impact of changing economic cycles on specific stocks is a complex exercise and should be left to professional fund managers. However, individual investors are better off directly investing in diversified funds, which offer the investment strategy that the investor is targeting. Also, one must bear in mind the point that a single stock exposure is not that lucrative compared to a diversified fund, which offers insulation against the negative impact of the markets' nosedive.

Is this the right time to invest in thematic funds, which are defensive in nature? If not, then when should one do so?

In a market such as India, where there is potential for sustained growth over a long period of time, equity investors should remain focussed on investments that have the potential for participating in such growth. The reason being, such type of an investment has the potential of delivering strong long-term growth. Thematic funds, which are defensive in nature, may pay off over a very short term. However, considering the fear sentiments in the street, for a long-term investor, these funds do not offer substantial value.

How much returns can an investor expect over a period of 3 to 5 years- both in arbitrage and in thematic funds, which are defensive in nature?