Hike in Debt Exposure Due to Arbitrage Funds

As the stock markets continue to show volatility in their behavior, coupled with the issue of rising interest rates, arbitrage fund managers have turned their attention to the humble world of fixed deposits. Obviously, India being a land of conservative investors, the thought of seeking personal loans, home loans etc are quite eerie amidst the rising financial pressure on everybody’s income. The main objective of Fixed Deposits is to ensure high and assured returns, in addition to their risk-free nature, making it quite a draw amongst customers. Several arbitrage funds have conveniently shifted their loyalties to fixed deposits, followed by debt instruments like commercial papers, certificates of deposits and so on. An analysis of this trend will indicate that people have shown a higher preference to instruments of public sector banks. The main reason behind this may be that people have high hopes on the performance of public sector units, which has been consistently high in spite of the economic debacle. Private sector banks have taken quite a beating with the global recession, with their performances charting an all-time low. Fixed deposits have also taken advantage of this situation, raising their interest rates to pull in more customers into their accounts. Commercial papers and Certificates of Deposit, as public sector instruments, are slowly gaining momentum too.

The objective of arbitrage funds is to benefit out of the short-term price differentiation in securities. With their primary principle of investment revolving around generating incomes through all such viable investment opportunities, they also seek to emerge out of the difference in pricing between the derivative market and the cash or money market. With transcending times, arbitrage funds can now be seen to place 65% of their investments in equity, owing to the obvious goodness of long-term investments, whereas 35% of their remaining funds are invested in fixed deposits. This is to lend the required stability to the fund, giving it the goodness of both the worlds – profitability through equity investments and security and more profitability through fixed deposits. This major difference in pattern of investment could be attributed to the spectacular performance of fixed deposits in the market, where fund managers are trying to cope with the fast-paced volatility of the stock market.

With equity markets constantly plummeting in their performance owing to the instability of the market, any chances of recovery and profitability of arbitrage funds was highly restricted. But with this change in plans and strategy, the fund has been shown to benefit quiet significantly. In such market conditions, fixed deposits are the best and safest bet for investors who seek assured and risk – free returns irrespective of the volatile market conditions. Before investing in fixed deposits, the fund manager of arbitrage funds must conduct extensive research on the interest rates offered by various banks. The fixed deposit chosen must also best suit the needs and requirements of the bank. After conducting a comparative analysis on which banks offer a desirable interest rate, look for a tenure that best suits your investors’ needs. For instance, in some fixed deposits, you need to deposit your money for a period of 5 years while in some banks the tenure may be for 10 years. There can also be a lot of variation in the interest rates offered by different banks for different tenures or periods of deposits. The method of calculating the rate of interest can vary as some banks may calculate the rate of interest on a quarterly basis, half-yearly, annual or on the entire period of maturity.

The interest that is gained from your fixed deposit can either be withdrawn or you can choose to reinvest it in the same scheme. If you would like to withdraw your scheme, then your interest will be credited directly to your savings account that has been mentioned by you on its receipt. On withdrawal of interest, you will be subjected to the same rate of interest as last year.