Mutual Fund Corner: Masterclass on investing bias, the allure of arbitrage funds

In this episode of ‘Mutual Fund Corner’, CNBC-TV18 spoke to Prableen Bajpai, Founder of Finfix Research & Analytics and Kaustubh Belapurkar, Director-Fund Research at Morningstar India.

Bajpai talked about the big behavioural biases that can decrease the performance of your portfolio.

She pointed to a BEFI Barometer survey that has found that recency bias is topping the chart with 35 percent. Bajpai explained that recency bias is nothing but a tendency as a human to give more weightage to a recent event as compared to an event that has happened earlier.

“When it comes to investing, a lot of investors fall victim to it because they give more importance to any recent event, or in fact, the recent performance of any particular asset class or a scheme and this leads to a myopic vision and they tend to start drifting or shifting their portfolio towards an asset class, which looks promising at that point in time,” she said, adding that this can jeopardise the long term returns or the right asset allocation for an investor.

Talking about loss aversion she said, “We all hate losing and we will do anything to avoid losses.” She highlighted a paper published in 1979 that said the pain that people feel when they lose something is much more than the pleasure they get from gaining something in the same amount.

“When this particular bias is extreme, people tend to cut down losses, they want to move out wherever they see any negative returns. So, this tendency in extreme leads to very conservative creation of portfolios to mirror, so a balanced portfolio needs to be created to overcome this particular bias,” Bajpai asserted.

Meanwhile, Kaustubh Belapurkar talked about the arbitrage funds that have been seeing an unusual amount of interest and activity from investors. In just the month of July, almost Rs 15,000 crores has come into arbitrage funds, which is nearly double of the previous month. In fact, the whole of 2021 has been a very good ride for arbitrage funds.

Belapurkar said, “When you think about arbitrage funds, the first thing that you want to highlight is fairly low risk funds. He said that these funds they hold hedge positions in equities, so the returns of these would be akin to liquid funds or alter short duration funds, like fixed income funds

“Period fund is like an equity fund because these funds would essentially buy long equity exposure and stocks, and at the same time sell futures in a corresponding amount to entirely hedge the exposure of that long equity, so you are holding 65 percent long equity, but net equity is exactly zero. So you don't have any equity exposure in the sense of being exposed to the volatility,” Belapurkar explained.