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

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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?