The Hindu Business Line : UTI plans SPrEAD Fund aiming to tap cash, derivative difference

UTI Mutual Fund has mooted a fund that will invest in a mix of equity, derivatives and debt, with the idea of tapping arbitrage opportunities arising out of price differences between the cash and derivatives market.

The proposed UTI-SPrEAD Fund (Spread between Prices of Equity And Derivative Fund) will offer two plans, A and B.

Plan A will try to provide capital appreciation and dividend distribution through arbitrage opportunities arising out of price differences between the cash and derivative market. It will invest chiefly in equities & equity-related securities and derivatives, while the balance will be invested in debt.

Plan B will aim to do the same by investing mainly in debt securities; the balance portion will be allocated to equities and derivatives.

The fund manager will use various derivative products allowed by regulations. Their use will require an understanding of the underlying instrument, the offer document has stated, adding that risks also include those stemming from mis-pricing or improper valuation and the inability of derivatives to correlate perfectly with underlying assets, rates and indices.

Under normal market circumstances, Plan A will allocate at least 51 per cent of the net assets to equities. Derivatives, however, may account for as much as 100 per cent of the assets if circumstances so warrant. A maximum 49 per cent may be invested in debt and money market instruments.

Plan B, under normal market circumstances, may invest a maximum 49 per cent in equities. Further, the maximum limit for derivatives is also 49 per cent.

The duration of the debt portfolio would primarily be managed with a view to generate income with minimum interest rate risk, the offer document has mentioned. The fund, incidentally, will also seek to enhance returns through arbitrage between spot and futures equity markets.

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