A shield against assault

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teeth, taking medicines, and accessing the internet."

However, adds Iyenger, "It must be also noted that these funds, which are defensive in nature, have fallen almost to their threshold limit and beyond, which to expect a dip would be far-fetched or expecting too much." Even a contra fund, which doesn't follow herd-mentality stocks, bore a sharp assault of the markets. The reason being, it is reported that the composition of these funds is either momentum or high-growth stocks, which are different from the fundamentally strong but out-of-favour stocks. The funds, which stood the test of turbulent times, were the arbitrage. These funds scored on two parameters. These funds gave positive returns, and surprisingly on a consistent basis. When most of the mutual funds bore the across-the-board-impact of the markets, these funds had a growth in between 4-5%. And hence, an investment in these funds would have been an intelligent decision.

In fact, delving into the difference in the objective of these funds would help you understand clearly why a pure equity investment is not the best investment option over an arbitrage or a fund, which is defensive in nature.

The reasons

In case of arbitrage, diversified funds, it is the very structure, mode, and objective of investment that differs and negates any negative impact of the markets. Arbitrage funds aim to take advantage of arbitrage opportunities between the cash and the futures market to generate fixed income.

Therefore, these are a type of income scheme. The arbitrage is sought by taking advantage of the mis-pricing between the cash and the derivatives market. Hence, the possibility of managing relatively better returns than traditional equity investment increases in arbitrage funds.

While in case of a diversified mutual fund that invests in the stocks of various companies of various sectors, it is like what multi-cap funds offer - the flexibility to invest across market cap segments. And it is seen that their returns are similar to multi-cap funds, and considering the volatility in the markets, these funds negate, to an extent, the chances of a dip in the returns. Hence, these funds have relatively delivered a good performance.