Monday, March 10, 2008


Gem Gaze
Versatility in Volatility!
How would you like to invest in a fund that gives you:
  • better returns than liquid funds
  • same risk as a liquid fund
  • much better tax treatment than a liquid fund
I can see you raising your eyebrows in suspicion. No, this is certainly not a ‘get rich quick scheme’ that will fleece you of your money.

It is an equity fund that is like a debt fund: an Arbitrage Fund! The common USP of these funds is to earn virtually risk-free return of around ten per cent (which is twice as much as the conventional short term debt funds) from an equity investment, that too on a regular basis, by doing arbitrage between the cash market and the futures market. This fund is aimed at an investor who seeks the returns of small-savings instruments, safety of bank deposits, tax benefits of RBI Relief Bonds and liquidity of a mutual fund!

Benchmark Derivative Fund

First off the blocks was Benchmark Mutual Fund, which launched its Benchmark Derivative Fund in December 2004. However, a minimum investment stipulation of Rs 2 lakh meant it excluded most retail investors. With a meagre corpus of Rs 55 cr., its return since inception is an unimpressive 7.5%.

JM Equity and Derivative Fund
JM Equity and Derivative Fund, launched in February 2005, was the first fund in India to allow the retail investor to avail the facility of arbitrage. It is an income-oriented interval scheme that invests in derivatives. It has reportedly relied on heavy FD exposure (almost one-third) with the likes of HDFC Bank, IDBI Bank, Union Bank of India and State Bank of Bikaner & Jaipur.
JM Arbitrage Fund
JM Arbitrage Advantage Fund, launched in June 2006, has a higher exposure to derivatives (thanks to the changed SEBI rules)and is an equity arbitrage product (65% is maintained in equity). Being an interval fund like its counterpart, the liquidity in JM Arbitrage Advantage is not as high as in an open-ended fund. The redemption is once in a month, that is, the last Thursday of every month which coincides with the settlement of the futures contract. Since the cash and the futures prices converge on that day, the returns are higher as you realise the spread that you had locked in the beginning of the month. Both the funds earned an average one year return of around 8.5%.
Prudential ICICI Blended Plan
Launched in May 2005, Prudential ICICI Blended Plan strikes a mix between equity, debt, money market instruments and derivatives even as it aims at capital appreciation and income distribution. The fund offers two plans, both of which pursue a spot-future arbitrage strategy. Plan A tries to maintain 50 per cent exposure to fully hedged equity, up to 49 per cent in money market securities and a small percentage in equity, adequate to cover the 51 per cent required exposure. Plan B invests between 51-100 per cent in money market instruments and the balance in fully hedged equity. With a corpus Rs. 695.65 crores and a one year return of 8.88%, it ranks third among its peers.
Kotak Equity Arbitrage Fund
Launched in September 2005, it was earlier called Kotak Cash Plus. The investment objective of the scheme is to generate income from investment in debt and money market securities and by availing arbitrage opportunities between prices of spot and derivatives markets. With a corpus of Rs. 429 crores, its one-year return is a tad higher than 9%, the highest in the category.
Launched in June 2006, the investment objective of this Rs. 272 crore open-ended fund is to provide capital appreciation and dividend distribution through arbitrage opportunities arising out of price differences between the cash and derivative market by investing predominantly in equity and equity-related securities, derivatives and the balance portion in debt securities. With an average one year return of 8.95 %, it secures the second position.

SBI Arbitrage Opportunities Fund
Launched in September 2006, the fund invests 65 to 85 per cent of its assets in equities and equity derivatives and the rest in debt and money market instruments. With a corpus of Rs. 695 crores and a one year return of 8.74%, it is an average performer.
Standard Chartered Arbitrage Fund
Launched in November 2006, the Standard Chartered Arbitrage Fund is an open-ended equity scheme that invests in cash and futures across markets. The fund has two plans, one for the retail investor and the other for the institutional investor. It boasts of the highest corpus of Rs. 1316.05 crores in this segment. In its one year existence, it has turned in a below-average performance reflected in its one year return of 7.85 per cent.
Launched in April and September, 2007, Lotus India Arbitrage Fund and HDFC Arbitrage Fund are the latest entrants in the arbitrage arena. With less than a year of existence, it is too early to judge their performance.
You can park your short-term surplus with arbitrage funds - around 10 to 20% of a portfolio should be allocated to these funds. You should take a three to six months time-frame while investing in arbitrage funds. Clearly, one of the reasons is that you have an exit load of 0.35%. Now it looks to be a small load, but in the overall reckoning it eats into the total returns. Moreover, like any investment, there is a gestation period. For a derivative position to unfold its true potential it takes around three to six months. This is because futures contracts are for a month. So a strategy to roll over, hold, buy or sell requires three to six months to fructify. The market is very volatile at present and Arbitrage funds are an option you can consider at this time. They are an ideal way to get a decent return with moderate amount of risk.

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