I have always entered the stock markets, when scripts were overvalued and exited it,when they were near the rock bottom. My broker used to say that I lost money due to the “volatile markets” . Nowadays, I dread the word “volatility” so much that, I want it to pay for all my misfortunes. Finally I think my prayers have been answered in form of “Arbitrage funds”.

The arbitrage fund takes advantage of the difference in pricing between the cash and the derivative markets. Going long in the cash market and short in the futures market and vice versa. This hedges the risk and ensures that the returns are green in color.

But is that so easy? No it’s not! It important to spot the arbitrage opportunity in the market which is the forte of an efficient Fund Manager. The fund manager thrives on volatility in the market. So did the fund managers lap it up when market provided an opportunity to die for on may 18?

So how did the arbitrage funds perform on the Golden Monday?

The average growth of such funds for 2008-2009 was around 8%p.a. but the average growth for the month of May 09 itself is 5%. Hence, it clearly means that at the 5% growth rate, the average per annum growth will be 60%, This is stupendous, even if one compares growth rate of the best performing stocks in the share market. The arbitrage funds have proved that it performs best, when there is volatility in the market.

The arbitrage funds have proven to be a consistent performer over a period of time. The arbitrage funds gave a return of around 8% even when most other equity funds saw their net asset values (NAVs) falling by over 40 per cent.

From April 2008-09, when the net asset values (NAVs) of mutual funds declined by 30 to 50 per cent and the Sensex also declined by about 60 per cent, during the same period arbitrage funds have given returns of about 8.5 per cent. For arbitrage funds, stock prices are not significant but volumes in futures are of much more importance. In 2008-09, volumes in future trading were about Rs 85,000 core per day and now they have come down to about Rs 15,000 crore per day. For better returns in arbitrage funds, both volatility and volumes are required as they create more investment opportunities.

The most important feature of arbitrage fund is that it generates returns irrespective of whether the markets are in positive or negative. It’s gives returns regardless of the market situation. It’s a win win situation for the investors.

Although, the arbitrage funds are equity linked, the investors should not compare it with normal equity funds. The major difference is that the arbitrage funds are partially exposed to the equity market. They just take the advantage of price difference between the cash and the derivative markets. The arbitrage funds are low risk compare to the equity funds. Such funds render some stability to the portfolio and ensure positive returns in volatile times. It is advisable to allocate a small part of your portfolio to such schemes.

The only downside of this is that the investors are not realizing the potential of the arbitrage funds. The arbitrage fund’s Asset Under Management (AUM) saw a considerable dip during last year, when the investors were vary of any equity linked funds. A part of this can be attributed to the fact that some of the investors are not aware of the real benefits of the arbitrage funds. The other reason can be the investors inability to differentiate between normal equity fund and the arbitrage fund.

The arbitrage funds are a win-win situation for investors. It’s the exact remedy for the volatility in the market . An investor should realize this and make the most of it.

Now you know how to make most of the volatility in the market, get the arbitrage advantage and make volatility pay back to you.

Personal loans are gaining popularity among loan seekers in a big way. Be it planning a vacation or getting you daughter married, down payment of your new house or medical obligations, a personal loan may be used for any purpose. A personal loan may be a secured or an unsecured loan where the end use of the money is not supposed to be declared while taking the loan. The rate for unsecured personal loans ranges from about 15 % to 25 % per annum depending up on the credit history and the income of the loan seeker. This type of personal loan is more popular among the public.

The problem begins when people take these kinds of loans for investments into various instruments including equities. Markets have been pretty volatile for last few months and are expected to behave the same for quite some time. So if you planning to take a personal loan and invest in to equities of mutual funds thinking that the markets are at low then think again. The inflation rate has been moving up. The last numbers posted was well above 12%. With the growth in the Gross Domestic Product (GDP) around 8% to 9% the economy may see a negative growth in the current fiscal. The Reserve Bank of India has tried to tighten the liquidity situation by increasing the Cash Reserve Ratio (CRR) by 50 basis points. They may increase it by another 50 to 100 basis points if needed to keep a check on the inflation numbers. The condition worsens if the loan you have taken is on a floating interest rate. You end up losing money in the equity markets and pay more towards the loan at the same time. This is like being the rope in a tug of-war match where both sides are trying to pull you towards themselves to the fullest.

A better way to invest into equity market is by the way of arbitrage. It is buying in the cash market using the loan amount taken and selling it in derivative market by way of futures at a price which is more than the price bought added with the interest amount. On the day of maturity you reverse your position on both the markets and difference of the amount over and above the cash market price added with interest on the loan and the price sold in the futures market is your profit.

To explain arbitrage lets take the following example.

One lot of Reliance Industries Limited (RIL) is of 75 shares. Suppose the price of one RIL share is Rs. 2200 on 1st July, 2008. The maturity is on 31st July, 2008. The total amount of loan of 75 shares is (2200*75) = Rs. 165000. If the interest rate is 18% per annum then for one month the amount of interest is (165000*1.5%) = Rs. 2475 which is (2475/75) = Rs. 33 per share. Thus you need to short one lot of Reliance at any price which is more than (2200+33) = Rs. 2233. If you manage to short at a price say Rs. 2250, then you make a profit of (17*75) = Rs. 1275 on one lot which is almost 9.3% per annum. Now no matter what the price is on the expiry, you will manage to earn the amount stated above as you have already squared off your position.

The main thing over here is to find the right price to buy in the cash market and sell in the futures market. If you manage to hit the right price over the screen, then bingo! You have made money where everyone is losing it.