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  • Terms Explained

    How does it work?
    We buy the stock of say Company A in cash segment and short the stock futures of the same Company A for the near month expiry on the exchange. Every month we keep rolling this position as long as we are earning our threshold of spread.

    How much do we earn on it?
    There is no fixed rate for the spread that we earn. Based on the market conditions currently we earn about 5-6% annually on this. This can increase or decrease in the future based on the market modalities.

    What happens if the stock goes up or down substantially? Are we speculating?
    There is no effect on our portfolio since we are long as well as short on the same stock. Irrespective of the movement in stock price, we will earn the same spread which we have locked in at the time of starting this position. We are not speculating at all on the movement in price of Company A. We will earn a risk free spread irrespective of how the Company A performs.

    Why don't you deploy these surplus funds in money market instruments?
    Money market instruments currently earn almost the same as these cash-futures arbitrage (give or take 50-100 bps annually). The reason for deploying the surplus funds in cash-futures arbitrage instead of money market instruments is to make sure that we have deployed 65% of our portfolio in Indian Equities in order to be classified as an Indian Equity fund and get the tax advantages associated with it.
    This ratio is a statistical measure of a Fund Manager's overall performance in down-markets. It is used to evaluate how well or poorly the Manager performed relative to a specific index during periods when that index has dropped.

    The ratio is calculated by dividing the Scheme's returns by the returns of the index during the down-market and multiplying that factor by 100.

    Downside Capture Ratio = Scheme Returns / Index Returns * 100

    A Fund Manager who has a capture ratio less than 100 has outperformed the index during the down-market by falling less than the index. For instance, a ratio of 75 indicates that the portfolio declined only 75% as much as the index during the period under consideration.

    Usually, schemes which have a more diversified portfolio (not just in terms of number of stocks, but in other aspects too) have better downside-capture ratios owing to their reduced risk profile, compared to schemes having a more concentrated portfolio.

    Also, in order to arrive at a meaningful conclusion, it is important that there be a relatively high correlation between the scheme's portfolio and index employed for the purpose of comparison.

    As the graphic depicts, Parag Parikh Long Term Equity Fund currently has a 1 year ratio of 68.85 as against - 19.75 for the BSE S&P 500 Index implying that the Scheme has given positive returns even as the BSE S&P 500 Index fell.

    Downside Capture Ratio...

    Disclaimer: This may or may not continue in the future.

    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
    © 2019 PPFAS Asset Management Private Limited. All rights reserved.
    Sponsor: Parag Parikh Financial Advisory Services Private Limited. [CIN: U67190MH1992PTC068970], Trustee: PPFAS Trustee Company Private Limited. [CIN: U65100MH2011PTC221203], Investment Manager (AMC): PPFAS Asset Management Private Limited. [CIN: U65100MH2011PTC220623]