Arbitrage strategies between the cash and derivative markets have helped market players earn 15-20 per cent returns in the last fortnight, according to industry sources.
With the medium term view on the market predicting continued volatility, asset management companies are moving in to fill up a gap in investors' portfolios.
Several fund houses have lined up their arbitrage and derivative products. While Tata Equity Management Fund's new fund offer is currently open, J M Equity and Derivative Fund II is hitting the market in a day's time.
UTI, Prudential ICICI, Standard Chartered have all filed offer documents with Securities and Exchange Board of India for launching similar funds.
This is the second round of derivative and arbitrage funds to hit the market. Sebi has recently reclassified these as equity funds and not debt funds, as was the case a year back when first versions of few of them were launched.
The common USP of these funds is to earn virtually risk-free return of around ten per cent (which is twice as much as the conventional short term debt funds) from an equity investment, that too on a regular basis, by doing arbitrage between the cash market and the futures market, according to fund managers.
In their earlier avatar, these funds could not invest more than fifty per cent of their corpus in derivatives. Now these funds can invest even the entire corpus in stock and index derivatives.
JM Financial Mutual Fund's second equity and derivatives fund will seek to generate income through arbitrage opportunities emerging out of mis-pricing between the cash market and the derivatives market.
Biren Mehta, Fund Manager. JM Financial Mutual Fund said, "The new fund will focus on arbitrage opportunities by investing in equity shares and taking simultaneous sale position in the derivative market in the same underlying security."
The universe of the portfolio will include 118 stocks on which futures are available. Eighty per cent of the fund corpus will be invested in equity and twenty per cent will be reserved for margins.
Mehta said, "Internationally, this class of funds is often called market neutral funds with no directional exposures and considered as safe investment avenue for the investors who are uncomfortable with volatility."
The Tata Equity Management Fund seeks to moderate the downside risk to the portfolio through hedging and using stock or index futures. The fund would also seeks to capitalise on both short term and long term opportunities through a stock specific or index oriented shorting strategy to enhance returns, according to the fund house.
"This fund presents a strategy to minimise risk and maximise return in such potentially volatile markets," said Ved Prakash Chaturvedi, managing director, Tata AMC.
JM MF expects to collect Rs 800 -1000 crore (Rs 8 to 10 billion) with this new fund. "We aim at providing 9-9.5 per cent tax free returns to the investors", Mehta said. JM's first arbitrage fund, launched in February 2005, manages assets worth Rs 877 crore (Rs 8.77 billion). In the past one month the fund has posted returns of 15.04 per cent return.