Monday, March 28, 2016


March 2016

Inflows into equity funds have dried up substantially as the Sensex went on a free fall in the run up to the Budget 2016. The latest AMFI data shows that the pace of inflows into equity funds, including ELSS, has come down substantially, especially during the last three months. Equity funds received net inflows of Rs. 2,522 crore in February 2016, down from the peak of over Rs. 12,000 crore net inflows received in June 2015. The AUM of equity funds fell from Rs. 3.84 lakh crore in January 2016 to Rs. 3.54 crore in February 2016 as the Sensex fell 8% last month. Inflows into equity ETFs too slowed down in February 2016 with net inflows of Rs. 1,190 crore. The decrease in inflows in equity funds can be attributed to the recent volatility in the market. However, due to sustained inflows through SIPs, net inflows in the category are still positive. Riding high on the optimism surrounding the market, investors had poured in Rs. 8,000 crore on an average during April-Nov 2015 in equity funds. This has helped the industry garner close to Rs.75,000 year to date.
Balanced funds
Balanced funds are the flavor of the season. The AUM in this category has jumped by 45% from Rs. 27,015 crore in April 2015 to Rs.39,104 crore in February 2016. In February 2016 too, balanced funds received net inflows of Rs. 941 crore.
ELSS inflows saw a moderate growth with the tax season coming to an end in a few days. The category saw net inflows of Rs. 888 in February 2016 as compared to inflows of Rs.786 crore in January 2016. ELSS funds manage Rs.36,409 crore AUM as on February 2016, which is 3% of the total industry AUM.
Other categories like income funds, gilt funds, gold ETFs, and overseas fund of funds witnessed outflows in February 2016.
The only category which saw healthy inflows in February 2016 was liquid funds which received net inflows of Rs. 20,039 crore.
All in all, the industry AUM dipped marginally by 0.85% from Rs. 12.73 lakh crore in January 2016 to Rs. 12.64 lakh crore due to mark-to-market losses in equity funds.

ICICI Prudential Mutual Fund has overtaken HDFC Mutual Fund to become the largest fund house in India. According to Value Research data, as on February 29, 2016 ICICI Prudential Mutual Fund’s assets stood at Rs 1.74 lakh crore against HDFC Mutual Fund’s Rs 1.7 lakh crore. In April 2015, ICICI Prudential Mutual Fund toppled Reliance Mutual Fund to become the third-largest fund house in terms of assets under management. What helped ICICI Prudential Mutual Fund shore up its assets is its fund performance across the board, particularly its consistently growing equity schemes. According to Value Research data, Reliance Mutual Fund is the third largest fund with assets of Rs 1.54 lakh crore, followed by Birla Sun Life Mutual Fund (Rs 1.31 lakh crore), and SBI Mutual Fund (Rs 1.06 lakh crore).

Overall, mutual funds witnessed an addition of 53 lakh investor accounts in the current fiscal, taking the total number of folios to Rs 4.7 crore. For a long time, investor accounts were not going beyond 2 crore. Out of 53 lakh folios added this financial year, 25 lakh are from towns beyond top-15 cities. Growing participation from retail investors, especially from small towns, huge inflow in equity schemes and several measures taken by SEBI has led to sharp increase in folios. The regulator has given extra incentives for those expanding into smaller cities. Mutual funds have reported net inflows of Rs 75,000 crore in equities in the current financial year, much higher than Rs 71,000 crore witnessed in the preceding fiscal. Interestingly, smaller towns have contributed 44% of such inflows. However, Foreign Portfolio Investors (FPIs) have pulled out more than Rs 27,000 crore from the stock markets in the current fiscal. This indicates that mutual funds are emerging as a new and very strong counterbalance to FPIs.

Piquant Parade

Reliance Capital has completed the transaction for receipt of approximately Rs 1,200 crore (US$ 180 million) from Nippon Life Insurance for additional 14% (from existing 35% to 49%) stake sale in Reliance Capital Asset Management (RCAM). Nippon Life Insurance, a Fortune 500 company and one of the largest life insurers in the world, has become a co-sponsor of Reliance Mutual Fund, along with Reliance Capital, and will own 49% in Reliance Capital Asset Management. The Board of Directors of Reliance Capital Asset Management approved the transfer of an additional 9.57% stake to Nippon Life Insurance, with the balance 4.43% to be transferred in the next couple of weeks. The transaction pegs the valuation of Reliance Capital Asset Management at Rs 8,542 crore (US$ 1.3billion), the highest valuation till date for any asset management company in the country. In line with the new shareholding, the name of Reliance Capital Asset Management would also be changed to Reliance Nippon Life Asset Management.

DHFL Pramerica Mutual Fund has completed its acquisition of Deutsche Mutual Fund. This acquisition will add Rs. 24,786 crore (AUM of Deutsche mutual fund in December 2015) to the kitty of DHFL Pramerica Mutual Fund. Currently, DHFL Pramerica is managing Rs. 2,163 crore as on December 2015. The deal was finalized for nearly Rs. 400 crore. The acquisition will catapult DHFL Pramerica to 13th position in the AAUM pecking order.The fund house has appointed former CEO of Deutsche Mutual Fund Suresh Soni as the new CEO of DHFL Pramerica Mutual Fund. Suresh, a Chartered Accountant and a Cost Accountant, has over 23 years of experience in the mutual fund industry, including several years as a fund manager and CIO of Deutsche Mutual Fund.

Edelweiss Asset Management Limited (EAML) has executed an agreement to acquire the onshore fund schemes managed by JP Morgan Asset Management India Private Limited (JPMAM), including its India based onshore mutual fund business and the international fund of funds, subject to regulatory approvals. The assets under management (AUM) of JPMAM stands at approximately Rs. 7081 crore, while the combined AUMs of both entities amount to approximately Rs. 8757 crore (as on Dec 31, 2015). Along with the schemes, EAML is committed to absorbing majority of employees of JPMAM ensuring business continuity as well as a platform for enhanced growth across the Edelweiss Group. Given the complementary business advantages and the significant business that JPMAM has built, this acquisition is a natural win for both Edelweiss and JP Morgan. This acquisition will give further impetus to EAML and move it to the next level of growth.
Regulatory Rigmarole

The Budget 2016 has proposed to introduce Krish Kalyan cess of 0.5% on service tax for the welfare of farmers. That means, the gross service tax burden on distributors commission is likely to go up by 50 basis points i.e. from 14.5% to 15%. The cess will come into force with effect from June 1, 2016. Input tax credit of this cess will be available for payment of this cess. Earlier in November 2015, the government had imposed 0.5% Swachh Bharat cess on service tax which had raised the service tax from 14% to 14.5%.

The Budget 2016 has proposed that AMCs can also merge multiple plans under one scheme. Such merger of plans within a scheme will be exempted from capital gains tax. The Budget 2015 had provided tax neutrality on transfer of units of mutual fund for scheme mergers only. Thus, many AMCs were awaiting clarity on whether merging multiple plans within a scheme would also attract capital gains tax. Now, there will be more consolidation of multiple plans within a scheme in the industry.  It may be recalled that in 2012, SEBI had asked fund houses to do away with multiple plans within a scheme. The regulator had asked AMCs to accept fresh subscriptions in existing schemes with multiple plans based on the amount of investment (i.e. retail, institutional, super-institutional, etc.) only under one plan. Other plans were supposed to be continued till the existing investors remain invested in the plan. Fund houses charge a lower expense ratio under institutional plans and a slightly higher TER under regular plans, since regular plans need to be sold through distributors by paying commissions which entails higher costs. The minimum investment amounts of institutional and regular plans differ. Typically, institutional plans accept Rs. 1 lakh as initial investment which can go up to Rs. 5 crore depending on the scheme. After the budget clarification on capital gains tax, many AMCs are expected to merge multiple plans within a scheme.

The government has proposed to exempt service tax levied on small mutual fund distributors earning a commission of less than Rs. 10 lakh annually. However, agents earning more than the threshold limit will have to pay a service tax of 14%. The move is aimed at increasing retail participation in the mutual fund industry. As per Budget document for 2016-17, the services offered by mutual fund agent/distributor to a Mutual Fund or AMC are being made taxable under forward charge with effect from April 1, 2016 so as to enable the small sub-agents down the distribution chain to avail small-scale exemption having a threshold turnover of Rs. 10 lakh per year, subject to fulfilment of other conditions prescribed. There are around 5,000 active mutual fund distributors and only 1,200 of them earn more than 10 lakh annually.

A relief for potential investors in real estate investment trusts (REITs) has proposed a tax pass-through status for dividend income for investors. This comes through in the form of an exemption from dividend distribution tax (DDT) for REITs. REITs are income producing real estate investments under one trust. The investments are backed by physical assets and income arising through these assets is distributed on a regular basis to investors. In 2014, Securities and Exchange Board of India cleared the norms for launching REITs. Although these have not been launched in India, the pass-through status will help in taking this further.
SEBI has asked AMCs to disclose the actual commission paid to distributors in the half-yearly consolidated account statements (CAS) issued to investors. This commission figure will include all direct monetary payments and other payments made in the form of gifts/rewards, trips, event sponsorships etc. by AMCs to distributors, according to a SEBI circular. “The amount of actual commission paid by AMCs to distributors (in absolute terms) during the half-year period against the concerned investor’s total investments in each MF scheme,” states the SEBI circular. In addition to commissions, AMCs will also have to publish the scheme TER in percentage terms for the half-year period for both direct and regular plans. “Such half-yearly CAS shall be issued to all MF investors, excluding those investors who do not have any holdings in MF schemes and where no commission against their investment has been paid to distributors, during the concerned half-year period,” stated the SEBI circular. Further, the CAS will also mention the total purchase value of investment in each scheme. The circular is effective October 1, 2016.

SEBI has asked fund houses to disclose the remuneration of CEOs, CIOs, operating officers, sales head and other officials earning over Rs.60 lakh per annum. This will come into effect from April 1, 2016. According to a circular, SEBI has said, “With the underlying objective to promote transparency in remuneration policies so that executive remuneration is aligned with the interest of investors, MFs/AMCs shall make such disclosures.” In addition, the market regulator has directed AMCs to segregate the disclosure of their average assets under management based on equity and debt. In addition, fund houses will have to disclose rate of growth over the last three years. Last year, SEBI is said to have examined the compensation structure of the key AMC personnel including fund managers operating from abroad for the last three years.

In a bid to improve transparency, SEBI has asked AMCs to put additional disclosures in scheme information document (SID) and key information memorandum (KIM) of existing as well as new schemes, according to a SEBI circular. Here are the additional disclosures which will be a part of all SIDs/KIMs: The tenure for which the fund manager has been managing the scheme along with the name of the fund manager, scheme’s portfolio holdings (top 10 holdings by issuer and fund allocation towards various sectors), along with a website link to obtain scheme’s latest monthly portfolio holding, expense ratio of underlying schemes in case of fund of funds, scheme’s portfolio turnover ratio. Additional disclosures which will be a part of SID: The aggregate investments made by AMC’s board of directors, fund manager, key managerial personnel in all schemes, illustration of impact of expense ratio on scheme’s returns (by providing simple examples). Further, AMCs will be required to publish separate SID/KIM for each MF scheme on their websites. Also, AMCs will have to have a dashboard on their websites which will provide the details of scheme performance. They will have to disclose the scheme’s AUM, investment objective, expense ratio, portfolio details, scheme’s past performance, among other things. AMCs will have to provide this data in a comparable, downloadable (spreadsheet) and machine readable format, said the SEBI circular. The circular is effective May 1, 2016.

SEBI has instructed fund houses to reduce reliance on rating agencies while investing in debt instruments. In addition, the market regulator has asked fund houses to set up in-house credit risk assessment mechanism before investing in fixed income securities. This will come into effect from May 1, 2016. According to a circular, SEBI has said, “In order to ensure that MFs/AMCs are able to carry out their own credit assessment of assets and reduce reliance on  credit  rating  agencies,  all  MFs/AMCs  are  required  to  have  an  appropriate  policy  and  system  in  place  to  conduct  an  in-house  credit  risk  assessment/due  diligence before investing in fixed income products.­­­”

SEBI has directed fund houses to pass on the interest accrued during the NFO period to investors. Mutual funds are allowed to deploy NFO proceeds in Collateralized Borrowing and Lending Obligation (CBLO) before the closure of NFO period. CBLO is a money market instrument, which means that the scheme earns interest from this account till the closure of NFO period on a daily basis. However, AMCs cannot charge management fee or advisory fee during this period. In a circular, SEBI has said, “The appreciation received from investment in CBLO shall be passed on to investors. Further, in case the minimum subscription amount is not garnered by the scheme during the NFO period, the interest earned upon investment of NFO proceeds in CBLO shall be returned to investors, in proportion of their investment, along with the refund of the subscription amount.” The circular comes into effect from April 1, 2016.

At a time when foreign fund houses are exiting Indian asset management business, a few domestic players are gung ho about starting mutual fund business. SEBI’s latest data on ‘Status of Mutual Fund Applications’ as on March 1, 2016 shows that Yes Bank, Fortune Financial Services & Credit Capital, Trust Investment Advisors and Karvy Stock Broking are awaiting approval from SEBI to launch mutual fund business in India.

Monday, March 21, 2016


March 2016

NFOs of varied hues

There has been growing demand from retail investors for mutual fund products as the investor base touched a record high of 4.64 crore in January 2016. To tap the growing demand from retail investors, mutual fund houses have filed draft papers with market regulator SEBI to launch 16 New Fund Offers. Retirement, fixed maturity plan (FMP), and equity are some of the themes for which mutual fund houses have filed applications. DSP Black Rock MF, Tata MF, ICICI Prudential MF, DHFL Pramerica MF, and Indiabulls MF have filed for fixed maturity plan. In addition, Birla Sun Life MF has approached for banking ETF and ICICI Prudential has submitted the draft document for retirement fund. A total of 191 draft papers were filed last year with the capital markets watchdog.

NFOs of various hues adorn the March 2016 NFONEST.

Sundaram Hybrid Fund – Series P

Opens: March 8, 2016
Closes: March 22, 2016

Sundaram Mutual Fund has launched a new fund named as Sundaram Hybrid Fund - Series P, a close ended hybrid fund with the duration of 1300 days from the date of allotment of units. The objective of the fund would be to generate capital appreciation and current income, through a judicious mix of investments in equities and fixed income securities. The fund shall invest 55%-90% of assets in fixed income securities, up to 20% in money market instruments and cash equivalents with low to medium risk profile, and invest 10-45% in equity and equity related instruments with high risk profile. The fund's performance will be benchmarked against the mix of CRISIL Composite Bond Index (70%) and Nifty Fifty Index (30%). The fund will be managed by Siddharth Chaudhary and Shiv Chanani. Dwijendra Srivastava and S.Krishnakumar are co-fund managers.

DSP Blackrock Equity Savings Fund

Opens: March 8, 2016
Closes: March 22, 2016

DSP BlackRock Mutual Fund has launched the DSP BlackRock Equity Savings Fund, an open ended growth fund. The fund intends to generate long-term capital appreciation by investing a portion of its assets in equity and equity related instruments. It will also invest in fixed income securities and use arbitrage and other derivative strategies. When arbitrage opportunities are available and accessible, the fund’s total exposure to equity and equity related securities could vary between 65% and 75% of the total portfolio, of which, equity derivatives including Index Futures, Stock Futures, Stock Options, and Index Options could be between 25% and 55%. The fund’s exposure to debt and money market instruments could vary between 25% and 35% of the total portfolio. While the equity portion aims to provide capital growth, the arbitrage portion endeavours to capture mispricing opportunities. Further, the debt portion will provide stability in returns and likely low volatility. The fund would be treated as an equity-oriented fund for the purpose of taxation, which could provide better tax efficiency than debt funds. The fund is benchmarked against the Nifty 500 (30%) and Crisil Liquid Fund Index (70%). DSP BlackRock Equity Savings Fund will be managed by Vinit Sambre and Marzban Irani.

ICICI Prudential Capital Protection Oriented Fund – Series IX Plan F

Opens: March 15, 2016

Closes: March 28, 2016

ICICI Prudential Mutual Fund has launched a new fund named as ICICI Prudential Capital Protection Oriented Fund – Series IX Plan F, a close ended fund with the duration of 1120 days from the date of allotment of units. The fund seeks to protect capital by investing a portion of the portfolio in highest rated debt securities and money market instruments and also to provide capital appreciation by investing the balance in equity and equity related securities. The fund is benchmarked against the Crisil Composite Bond (85%) and Nifty 50 (15%). The fund will be managed by Rahul Goswami, Chandni Gupta, Shalya Shah, and Vinay Sharma.

Sundaram Capital Protection Oriented Fund – Series 8 (5 years)

Opens: March 16, 2016
Closes: March 30, 2016

Sundaram Mutual Fund has launched a new fund named as Sundaram Capital Protection Oriented Fund - 5 Years - Series 8, a close ended capital protection oriented fund. The maturity period of the fund is 5 years from the date of allotment. The objective of this fund will be to seek income and minimise risk of capital loss by investing in a portfolio of fixed-income securities. The fund may invest a part of the assets in equity to seek capital appreciation. The fund will allocate 70%-100% of assets in fixed-income securities including money market instruments, if any with low to medium risk profile and invest up to 30% of assets in equity and equity related securities with high risk profile. The fund's performance will be benchmarked against CRISIL MIP Blended Index. The fund managers are Siddharth Chaudhary, Srividhya Rajesh, and S Bharath.

Kotak India Growth Fund Series 2 and 3 and DHFL Pramerica Money Market Fund are expected to be launched in the coming months. 

Monday, March 14, 2016


March 2016

Arbitrage funds leveraging the derivatives market
In an increasingly volatile market, investors try to reduce their exposure to market risk by hedging in the derivatives market. Mutual fund investors can exploit the arbitrage opportunities with lower costs than stock market investors.
All the GEMs that figured in the March 2015 GEMGAZE have retained their esteemed position in the March 2016 GEMGAZE too.

Kotak Equity Arbitrage Fund Gem

Incorporated in September 2005, Kotak Equity Arbitrage Fund has an AUM of Rs 4,278 crore. The one-year return of the fund is 7.28% as against the category average of 7.43%. The top three sectors are finance, energy, and FMCG. Top five holdings constitute 24% of the portfolio, with the equity exposure at 66% and debt constituting 25% of the portfolio. The portfolio turnover ratio is 190% and the expense ratio is 0.89%. The fund is benchmarked against the CRISIL Liquid Fund Index with Mr. Deepak Gupta efficiently managing the fund.

JM Arbitrage Advantage Fund Gem

The Rs 2538 crore JM Arbitrage Advantage Fund, incorporated in 2006, has earned a one-year return of 6.97% modestly trailing the category average return of 7.43%. Top five holdings constitute 37% of the portfolio with finance, energy, and FMCG forming the top three sectors. Equity constitutes 66% of the portfolio with 36% in debt. The portfolio turnover ratio is very high at 243%. The expense ratio is 0.79%. The fund is benchmarked against the CRISIL Liquid Fund Index. The fund is managed by Chaitanya Choksi since February 2011 and Asit Bhandarkar and Sanjay Kumar Chhabaria since July 2014.

SBI Arbitrage Opportunities Fund Gem

SBI Arbitrage Opportunities Fund, incorporated in October 2006, has an AUM of Rs 1348 crore. Its one-year return is 6.82%, a tad higher than the category average return of 7.43%. The top five holdings constitute 30% of the portfolio. Finance, energy, and healthcare are the top three sectors. 67% of the portfolio is made up of equity with 33% in debt. The portfolio turnover ratio of the fund is very high at 442%. The expense ratio is comparatively high at 1.10%. The fund is benchmarked against the CRISIL Liquid Fund Index. The fund is managed by Neeraj Kumar since October 2012.

IDFC Arbitrage Fund Gem

IDFC Arbitrage Fund is an eight-year old fund with an AUM of Rs 2862 crore. Its one-year return of 7.02 % is a tad lower than its category average of 7.43% at present. The fund is amongst the more consistent players in terms of beating the CRISIL Liquid fund Index over 70% of the times on a rolling – return basis. Top five holdings constitute 26% of the portfolio, with finance, healthcare, and auto being the top three sectors. The entire assets allocated to equity are 66% and 25% of the assets are in debt. While the portfolio turnover ratio is a massive 1932%, the expense ratio is very low at 1%, an icing on the cake, indeed. The fund has been managed by Yogik Pitti since June 2013 and Meenakshi Dawar since September 2015. 

ICICI Prudential Equity Arbitrage Fund Gem

Incorporated in December 2006, ICICI Prudential Equity Arbitrage Fund has an AUM of Rs 3583 crore. The one-year return of the fund is 6.81% slightly trailing the category average of 7.22%. The top three sectors are finance, healthcare, and technology. Top five holdings constitute 21% of the portfolio, with the equity exposure at 68% and debt constituting 29% of the portfolio. The portfolio turnover ratio is 71% and the expense ratio is 0.87%. The fund is benchmarked against the CRISIL Liquid Fund Index with Mr. Manish Banthia and Mr. Kayzad Eghlim efficiently managing the fund since November 2009 and February 2011 respectively.

Monday, March 07, 2016

March 2016

Arbitrage Funds – risk free, tax free!

Can you have your cake and eat it too? The obvious answer to this question is a resounding “No”! But there does exist an investment avenue which yields risk-free, tax-free return of around 8% p.a. to 9% p.a.!! Enter Arbitrage Funds.
If you wish to make your money work harder than what it does in a bank without taking additional risk and at the same time maintain immediate liquidity, arbitrage funds provide the best solution.  Debt funds are not the answer. They come with interest rate risk. Interest rates and prices of fixed income instruments share an inverse relationship. In other words, when the overall interest rates in the economy rise, the prices of fixed income earning instruments fall and vice versa. Then there is the spectre of credit risk. Debt or Income Funds essentially invest in fixed income securities of corporates. Now, if the corporate were to default on repaying its obligations, the fund and consequently its investors will get into trouble. The recent Amtek Auto incident is a case in point.
Therefore, investors have to look elsewhere…..some place that gives them fixed return at no risk. Investors not familiar with Arbitrage Funds might just end up thinking that these are just equity oriented schemes with another fancy name. However, this is not so. What such funds aim to do is to take advantage of the arbitrage opportunities between the cash and the futures market to generate fixed income. Therefore, though classified as equity, these are a type of income scheme. The arbitrage is sought by taking advantage of the mispricing between the cash and the derivatives market.
How does an Arbitrage Fund work?
You should first understand the word “arbitrage”. In short, arbitrage means – “simultaneous purchase and sale of an asset in order to profit from a difference in the price”.
Let me give you an example
·         Imagine that a person wants to buy a second hand phone and is ready to pay Rs 2,000 for it. You go to OLX and see that the same phone is selling at Rs 1,200 there. You then buy the phone at 1200 and sell it at 2000 and make the profit of Rs 800. This is one example of arbitrage
·         Another example of arbitrage is gold. Gold prices are different in various cities. So there is a possibility that gold can be cheaper in Bangalore compared to Chennai and a gold dealer buys it from Bangalore and sells it in Chennai.
In the examples above, the problem is that the buying and selling happens at two different times, and hence there is small risk.
But what will happen if you are able to buy and sell at the same time? In that case, there is no risk, because instantly you are locking the profits (the difference in price)
This is exactly what happens in Arbitrage mutual funds
In the case of arbitrage mutual funds, the funds explore the arbitrage opportunities where the same stock is quoting at two different prices at BSE and NSE at the same time and they buy and sell in different markets and make the profits. The other thing which an arbitrage fund does is use cash and derivative markets. For example, a stock might be available at Rs 100 on stock market, but it might be selling at Rs 104 in future’s market and they make the difference as profits.
Arbitrage funds take controlled exposure to equities. What do we mean by controlled exposure? They will simply carry out strategies which would have offsetting positions on various markets at the same time. In other words, the schemes take hedged positions that make them ‘market neutral’ or with no specific equity risk.

Features of Arbitrage Funds
  • Arbitrage funds are the best alternative to short-term debt funds as they generate higher returns in the short-term.
  • Most of the Arbitrage funds have equity ratio over 65% and are classified as equity funds. Hence, the long-term returns are tax free.
  • The short-term capital gains are taxed at a special rate of 15% (plus surcharge)
  • If you opt for dividend option of Arbitrage funds, the dividends are tax-free for equity funds.
  • While choosing arbitrage funds, you also need to look at the exit loads that range from 0.25% to 1% for exits varying from seven days to one year.
  • Most of the arbitrage funds have a small exit load anywhere from 0.25% to 0.5% if you take out the money before 90 days. In the case of liquid funds, there does not exist any exit load and you can take out the money even in a week without any loads. 
  • When markets are in stabilized mode, then there would be no scope for volatility and hence there will be no opportunity for earnings.
  • Coming to returns, Arbitrage funds can be compared to a Liquid fund and a good Arbitrage fund's returns potentials is in range of 8% - 9% depending on the time frame and the yield of the instruments they have invested into.
  • In the case of an arbitrage fund, redemption can take 3-4 days. Whereas, in the case of Liquid funds, this is just 1 day.
  • These funds are not suitable for long term wealth creation. They are mainly used for parking surplus money for short term duration in a tax efficient way compared to fixed deposits. It is recommended to have tactical investment in arbitrage funds from short term debt schemes for a period between 1 to 3 years.
Performance of Arbitrage Funds
The risk free nature of the returns is the USP of the product. There are around 14 Arbitrage Funds that are operating currently with the one year return being in the range of 7% p.a. to 8.60% p.a. The five year return is around 8.5% p.a. All the funds are yielding positive on YTD basis. The performance of these funds has also never faltered on other timelines as well with Reliance Arbitrage being the consistent performer with returns of above 8%. In the one year ended August 8, 2015 the best performing fund in the category was Kotak Equity Arbitrage Fund, with returns of 10.03%. The worst performing was Birla Sun Life Enhanced Arbitrage Fund, which returned 8.10%.

On the AUM front, Arbitrage funds basket has more than doubled from Rs 12000 crores of AUM in Jan 15, 2015 to around 30000 crores in Nov 15, 2015. JM Funds lead the pack with a corpus of Rs 5675 crores.

Arbitrage funds have been present in the market for a long time. But their returns have been comparable with those given by short-term debt funds, which is why they have not got much investor interest. These funds got a lot of attention as a substitute for short-term debt funds after the Union Budget 2015 reduced the tax benefits for investors in debt funds. This then becomes another alternative apart from Fixed Maturity Plans & Floating Rate schemes to beat the risks inherent in income schemes. Those who want a breather from the equity market and those who look for safe fixed income, should invest in Arbitrage Funds.
Volatile or unidirectional?
Do arbitrage funds do well only in volatile markets? The answer seems yes, because in volatile markets, there is a wide gap in prices in cash and derivatives segments, providing opportunities for making money. If you analyse data since 2007 and split it in periods when either the Nifty has moved significantly upwards or significantly downwards, you will observe that the base case returns delivered by arbitrage funds have been 7-8%. The highest returns have been 10-11%, proving that these funds can deliver stable and consistent returns across market cycles. Irrespective of the market movement, there will be a difference in cash and futures markets. This will ensure that arbitrage opportunities exist even if the markets are unidirectional or range-bound.
Lately, this fund is getting more funds and AMCs have managed to increase their AUMs mainly due to tax benefits over debt funds. Now, the question is whether the charm of arbitrage funds is here to sustain for a longer duration? Keeping this perspective in mind, we should understand that arbitrage funds have been around for more than five years in the market. After 2008, stock market correction, volumes in the fund had dried down, arbitrage funds had also lost their sheen. Currently, the taxation advantage in the short term over debt funds is what makes these funds attractive among investors. This short-term incentive is also an arbitrage opportunity, which should correct itself in due course, like any other mispricing opportunities.

In a nutshell, investors need to understand the concept of derivatives before investing in any arbitrage fund. It should not be treated as an equity fund aiming for capital appreciation. The returns of these funds are directly proportional to the volatility in equity markets: the more, the merrier. Exposure to these funds should not be more than 5% to 10% of the overall portfolio. They can be a good investment candidate for short term or as a “parking fund” for long term equity investments as they offer a tax advantage over debt funds.