On the prejudices of philosophers, the remarkably profound thinker Friedrich Nietszche wrote ?How could anything originate out of its opposite? For example, truth out of error? Or the will to truth out of the will to deception? He opined ?Such origins are impossible; whoever dreams of them is a fool, indeed worse; the things of highest value must have another, peculiar origin – they cannot be derived from this world.? The way the markets are moving, it seems that the incomparable thinker?s observation holds significance in today?s markets as well. To assume that out of this languishing phase of markets would emerge a strong and linear trend would amount to ignoring the sources of the languishing trend.

The all-pervaded impact of the markets, which on one occasion seems to rebound and another languish, has left investors with little options to sustain their interests. So, is it expecting of the opposite that would help? More precisely, it is the arrangement that would help you access the opportunities (which still exist!). With equity, being the most volatile and susceptible to markets? developments, a renewed focus on mutual funds would be a wise decision on your part to make money, if not at a brisk pace, but at a steady one.

FE Investor did a study of various categories of mutual funds. The reason for the study was to find out, which are the less hit or solid performers amongst the mutual funds, which have also borne the brunt of the across-the-board-impact of the markets. Here are the findings of the study that would help you understand why certain funds do better than others and why you should invest in these funds. Also, being invested in these funds, though they have advantages, it doesn’t guarantee you assured returns.

The findings

Across various categories of funds, pharmaceuticals, IT, FMCG sectors (read as thematic funds), which most times in the markets act as defensive ones, didn’t give the expected relief in the increasing turmoil of the markets. However, on a relative comparison basis, when other thematic funds fell almost 30-35%, pharmaceuticals, IT, FMCG plunged between 11-28%. Explains Vinayak Iyenger, a mutual fund distributor, “It is better to invest in themes, which are defensive in nature. The reason being, these themes can withstand any dip in the markets. It is like even though the markets nosedive, it won’t stop you from eating, brushing your 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.

But are funds a haven for investors in the time of a steep dip in the markets. The answer is a big no. Even though having an exposure to arbitrage, diversified funds limit your risk probability, it is the arrangement on your side that will play the trick for you.

A word of caution

Instead of going for a single-category fund exposure, it is better you go in for an array of funds. This array may be an amalgamation of arbitrage, diversified funds along with an exposure to contra funds would also be one of the most sensible and lucrative ones. But it is not the assured way of getting returns, considering the fact that a single-focussed investment in contra funds in the past six months has wiped out a chunk of investors’ money.

Hence, sensing the markets and keeping a tab on developments (news-both of companies, from companies) would stand in good stead for you. More importantly, it is the faith in your own investment decisions, taking into account the long term that would ensure that you sail through any dip in the markets. Because hoping the opposite always entails the risk of being myopic.