The Hindu Business Line : Arbitrage advantage

If you have been fascinated by the commodities market, but deterred by lack of knowledge and professional help, check out the new arbitrage product launched by Apollo Sindhoori.

Targeted at the conservative investors with capital preservation as a priority, it offers an earnings opportunity of 12 per cent a year (though neither is guaranteed). Investments are restricted to gold and silver futures.

Investment Requirements

The product requires a minimum investment of Rs 1 lakh and in its multiples thereafter, with no limit. There is a three-month lock-in after the initial investment. Premature closure is allowed with a closure charge of 1 per cent. Returns that your positions yield would be remitted to your account every quarter. A contract note will be despatched regularly with the details of the positions taken on your behalf.

Product Details

The product is based on the principle of arbitrage, wherein an asset is simultaneously purchased and sold to take advantage of a temporary mis-pricing in the market.

This product tries to take advantage of the price differences in the current month and next month futures contracts of gold and silver. The difference, if spotted on time, can translate into significant returns. In other words, the product seeks to use arbitrage opportunity without eroding the initial capital investment.

The arbitrage transactions are backed by physical delivery of gold/silver. The annual return of 12 per cent that is proposed is based on the arbitrage spread that the position offers. The commission charges are negotiable and depend on the amount invested.

Pros and cons

The product will be of use to conservative investors who park money in fixed deposits and other liquid funds. Commodity trading in India is at a nascent stage, at least as far as investor awareness is concerned. So professional help may be an advantage. The product offers to hedge all positions that will be taken on your behalf, thereby reducing the probability of large losses. Hedging helps in limiting your downside risk though caps the upside potential of your positions.

Yet another advantage is, compared to other agricultural commodities, bullion offers higher liquidity and longer shelf-life when physical delivery is made. Another benefit of this product is that after investing, you do not have to monitor the market, following the price movements to spot arbitrage opportunities. You would have a dedicated dealer doing that for you.

But before you make a final decision, you should understand that the arbitrage spread offered in both gold and silver depends very much on the ability of the company to predict its trading range (in which both gold and silver trade for the month). So at times when the market and, therefore, the trading range gets erratic, returns might be affected. Another point of concern is that as it is the first organised product of its kind, there is no historical data to validate the product's performance. Further, the opportunity cost for not having invested in equity should also be considered.

For more details on the product, log on to www.apollosindhoori.com.

More Stories on : Commodity Markets | Gold & Silver | Young Investor

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