Arbitrage funds to trailing returns: Expert answers investment questions

The performance of a fund varies based on the performance of the underlying asset classes, says Ashwani Bhatia

If I have a one-year investment horizon, should I opt for arbitrage or short-duration debt funds? I understand that short-term funds, too, have default risks. What are the risks associated with arbitrage funds?

Fundamentally, the returns for short-duration and arbitrage funds should be in the same range. Arbitrage spreads are linked to short-term interest rates in the economy. Arbitrage funds are, however, relatively low-risk products. These schemes capitalise on profitable arbitrage opportunities (price differential in a stock) between cash and futures markets. The risk that an investor may face is in the form of lower interest rates in the economy or higher trading volumes. Such events may result in lower returns. The difference between the price of a stock in the cash and futures markets is also a factor of the interest rates in the economy. Hence, if the interest rates are low, the spreads tend to be narrow. In the case of a market scenario where trading increases, the spreads between the cash and the futures market may come down. Further, arbitrage funds offer better tax-adjusted returns as they qualify for equity taxation.

What is the difference between trailing and rolling returns? Between the two, which is a better indicator of performance?

Trailing returns show point-to-point returns for a fund for a specific period, such as one-year, three-year or five-year. On the other hand, rolling returns present the average return of a fund for a specified period calculated on different frequencies, such as daily, weekly, monthly. Take an example where you want to calculate three-year average rolling return for a fund on a monthly frequency. Point-to-point (three year) returns at the end of every month will need to be taken. An average of all the point- to-point returns will give you the three-year average rolling return of a fund. Trailing returns tend to reflect recent market conditions and can present a distorted picture of a fund's performance. Rolling returns help gauge the consistency in fund returns as it takes into account performance across periods. 

There are expectations that the US economy will see a slowdown. Does it make sense for me to stop further investments in international fund focused on the US? Instead, I can use the same money to increase my systematic investment plan (SIP) in a domestic fund.

We are witnessing a slowdown across the globe, and the US economy is not immune to this phenomenon. Further, geographical diversification should be looked at based on your overall portfolio as any change in allocation may lead to a change in the risk profile of the portfolio. Please consult your financial advisor to understand better the suitability of the change in allocation for your overall portfolio.

Why is the performance of conservative hybrid funds always in line with debt funds though they also invest 10-25 per cent in equity? For a senior looking for less risky investments, what is the alternative you would suggest?

The performance of a fund varies based on the performance of the underlying asset classes. While at times the performance of a debt-oriented fund and that of a conservative hybrid fund could appear similar, that could be due to the lower or flat returns from equities. You can look at debt-oriented products investing in high credit quality instruments as an alternative.

The writer is MD & CEO, SBI Mutual Fund. The views expressed are the expert’s own. Send your queries to yourmoney@bsmail.in