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Absolute Return Strategy
ab-suh-loot ri-turn stra-tuh-jee
An absolute return strategy focuses on one simple goal: making positive returns, no matter what the market is doing.
Most investments try to beat an index like the Nifty 50. But here, the aim is different — protect your money and grow it steadily, whether markets go up, down, or stay flat.
To do this, fund managers actively manage risk. They may balance positions, hedge exposure, and move money across different asset classes to avoid large losses.
These strategies are commonly used in hedge funds and certain mutual funds, especially when markets are volatile or uncertain.
Key Features:
• Focus on positive returns, not beating the market
• Strong emphasis on protecting capital
• Uses strategies to reduce risk and smooth returns
• Flexible across different asset classes
• Typically targets steady, moderate returns with lower ups and downs
In India, a common example is arbitrage funds. A fund may buy shares and simultaneously sell futures on the same stock to lock in small price differences. This helps generate relatively stable returns without depending on market direction.
Since arbitrage funds invest heavily in equity instruments, they are taxed like equity mutual funds. Short-term gains (within 12 months) are taxed at applicable rates, while long-term gains (after 12 months) are taxed with an exemption limit (currently ₹1.25 lakh per year). Dividends are taxed as per the investor’s income slab.
Overall, the idea is simple: aim for steady returns with lower risk, instead of chasing high returns with high volatility.
1980s–1990s:
2000s:
2008 crisis:capital protection
2020s:retail investors
Definition
An absolute return strategy focuses on one simple goal: making positive returns, no matter what the market is doing.
Most investments try to beat an index like the Nifty 50. But here, the aim is different — protect your money and grow it steadily, whether markets go up, down, or stay flat.
To do this, fund managers actively manage risk. They may balance positions, hedge exposure, and move money across different asset classes to avoid large losses.
These strategies are commonly used in hedge funds and certain mutual funds, especially when markets are volatile or uncertain.
Key Features:
• Focus on positive returns, not beating the market
• Strong emphasis on protecting capital
• Uses strategies to reduce risk and smooth returns
• Flexible across different asset classes
• Typically targets steady, moderate returns with lower ups and downs
Case Study
In India, a common example is arbitrage funds. A fund may buy shares and simultaneously sell futures on the same stock to lock in small price differences. This helps generate relatively stable returns without depending on market direction.
Since arbitrage funds invest heavily in equity instruments, they are taxed like equity mutual funds. Short-term gains (within 12 months) are taxed at applicable rates, while long-term gains (after 12 months) are taxed with an exemption limit (currently ₹1.25 lakh per year). Dividends are taxed as per the investor’s income slab.
Overall, the idea is simple: aim for steady returns with lower risk, instead of chasing high returns with high volatility.
Historical Reference
1980s–1990s:
2000s:
2008 crisis:capital protection
2020s:retail investors
Illustration
