Monday, March 25, 2013


March 2013

Assets under management (AUM) of the mutual fund industry fell 1.5% to Rs 8.14 lakh crore in February 2013 from the record high in January 2013 due to mark-to-market fall in equity-oriented mutual funds following the 6% decline in the CNX Nifty during February 2013, according to a report by CRISIL Research. The AUM of equity funds declined to Rs 1.76 lakh crore, which was down over 7% or Rs 13,800 crore, marking the largest decline in the past 15 months. In addition, the inflows saw sharp drop in net inflows of Rs 3,600 crore in February 2013 as compared to Rs 60,700 crore in January 2013. However, net outflows from the category slowed to Rs 160 crore in February 2013, which was the lowest in the past nine months. On income funds front, the AUM in this category fell by 1.4% to Rs 3.93 lakh crore in February 2013, primarily due to outflows of Rs 5,300 crore from the category. Tight liquidity conditions towards the end of the financial year saw redemptions from short maturity debt funds. While FMPs (fixed maturity plans) have seen redemptions of Rs 1,600 crore, these have been balanced by inflows of Rs 2,100 crore into interval funds. The major share of inflows of Rs 8,600 crore came into the liquid or money market funds. Gilt funds continued to see inflows for the sixth consecutive month in February 2013 despite being lower than the previous month. Inflows were lower at over Rs 400 crore in February 2013 compared with Rs 1,100 crore inflow in January 2013. Interestingly, gold ETFs saw outflows for the first time since June 2012 with the AUM falling by 4% to Rs 11,600 crore in February 2013 due to mark to market losses and outflows.

Despite declining gross sales in the equity segment, the country’s mutual fund sector has something to cheer about. Its largest client base, the retail investors, did not shrink as fast in February 2013 as was the case so far in the financial year 2012-13. At a time when equity schemes came into the limelight due to the sharpest decline in asset under management in 15 months, the near-halving of equity account closures is some respite. Data from the Securities and Exchange Board of India show a closure of 230,000 equity folios in February 2013, far less than the average monthly loss of a little over 400,000 till the immediate previous month. Till June 2012, the number of accounts closures ranged between 180,000 and 300,000 a month. In the second half of the calendar year, the pace accelerated, with some months seeing 500,000 folios getting closed. February 2013 saw less of cancellations of systematic investment plans but fresh purchases also declined. Overall net outflow from the equity segment was the lowest in many months at Rs 163 crore. Gross sales of equity schemes dipped 33% to Rs 3,713 crore though, against Rs 5,600 crore in January 2013.
Investors have put in more than Rs 1.2 lakh crore in various mutual funds during the first nine months of the ongoing financial year compared to cumulative net outflow of nearly Rs 80,000 crore in the last two financial years. There was a net inflow of Rs 1,20,269 crore between April and December 2012, against outflows of Rs 28,602 crore in the entire fiscal 2011-12 and Rs 49,406 crore during 2010-11, according to the Economic Survey. Prior to that, mutual funds had mobilised Rs 83,000 crore in 2009-10. This significant level of fund mobilisation from the market in 2012-13 has also helped the total assets under management of mutual funds to grow to Rs 7.59 lakh crore as on December 31, 2012 compared to Rs 5.87 lakh crore as on March 31 2012, an increase of 29.4%. Equity mutual fund redemptions decelerated in February 2013 as S&P BSE Sensex dipped more than 1000 points. Equity mutual fund net outflows slowed down to Rs 128 crore in February 2013 as against Rs 2501 crore in January 2013 as the S&P BSE Sensex declined 5% during the same period, according to the latest AMFI data. 

Piquant Parade
AMFI has initiated the process of forming a company to run MF Utility. AMFI’s MF Utility committee has shortlisted Chennai based software company Polaris from a list of nine players for developing the much-awaited online investment portal. Each AMC is likely to contribute Rs 5 lakh each for this project. The proposed company, which will oversee the day-to-day operations of MF Utility, is to be run on a no-profit no-loss basis. At this juncture, the committee has not envisaged recovering any transaction fee from users. The portal will connect with RTAs, AMCs, stock exchanges, DPs, banks, and centralized KYC repository. The portal will facilitate industry MIS, common account statement (CAS), capital gains statements, complaint module/feedback module, dashboard, manage profile/settings, call centre access and technical helpdesk, client level alerts for investors and distributors (email /mobile), downloads, etc. Investors have to first get their KYC done after which they have to fill up a common account opening form and submit them to centralized account opening repository. The system will then generate a unique account number, which could be used across AMCs.

UTI Mutual Fund has roped in more than 500 new cadre of distributors after SEBI opened up a new channel of distributors like postal agents, retired government and semi-government officials, retired teachers, retired bank officers, and bank correspondents. UTI Mutual Fund has also sponsored the certification for new cadre of distributors. UTI is also imparting training on preparing a financial plan and on operational procedures like KYC, bank account requirements, etc. Other AMCs like HDFC and ICICI Prudential too are in the process of enrolling new distributors. Enrolling these distributors has not been an easy task for AMCs. Firstly, NISM verifies the experience of new cadre of distributors after which they are given training. After this training, AMCs approach CAMS for registering and procuring ARNs. CAMS also conducts a second layer of due diligence by verifying the original documents of distributors. People qualifying as new cadre of distributors can either pass the existing NISM-Series-V-B: Mutual Fund Foundation Certification Examination or complete a one day NISM Mutual Fund Foundation CPE Program. The new cadre of distributors will not be required to shell out any ARN registration fee till June 30, 2013. SEBI’s efforts to add a new layer of distributors comes in the wake of declining distribution force in the industry. Out of the 80,000 registered ARNs with AMFI, today, there are about 50,000 odd KYD compliant distributors. Out of these 50,000 distributors, unofficial reports peg the active distributors number at a much lower 10,000.

AMFI is once again running its advertisement campaign ‘Savings Ka Naya Tareeka’ to spread awareness about the benefits of investing in mutual funds. It is a 360 degree campaign. There are also plans to do some on-ground events. The response on these commercials has been positive. The first campaign went on air in September 2011 with a budget of around Rs 10 crore. The campaign had received over 30,000 sms from people. AMFI had also sent mutual fund booklets to those people who had sent an SMS to 56070. It had also set up a call center to answer people’s queries. Parallely, AMCs have been running ground level events to create a higher grass roots level awareness. According to AMFI, 36 AMCs had conducted 11402 programs in 405 cities covering 318,991 participants in 2011-2012.

UTI Equity Fund has won the best equity fund award while Birla Sun Life MNC Fund has won the best small/mid-cap fund award. HDFC Mutual Fund walked away with the best equity fund house for fourth year in a row and best multi-asset fund house for the third year in a row at the Morningstar Fund Awards 2013. Birla Sun Life Mutual Fund bagged the best debt fund house award. The other two contenders in the best debt fund house category were ICICI Prudential and UTI. In the best equity fund house category, the other two contenders were Franklin Templeton and Reliance. Winners for seven fund categories were selected by applying a quantitative methodology, along with a qualitative overlay, which emphasized one-year performance but also considered the three- and five-year performance history of all eligible funds.

Regulatory Rigmarole

Complicated KYC norms are deterring first time investors to invest in mutual funds. Mutual funds distributors are seeking uniform and standardized Know Your Customer (KYC) norms as the existing norms have been creating complications and inconveniencies for them as well as investors. At present, a separate KYC is needed for different financial products. The recent announcement of Finance Minister P Chidambaram to consider bank KYC as good enough for insurance products, has raised expectations among mutual fund distributors too. A single KYC for all the financial transaction would boost investments in the mutual fund industry.

India’s capital market regulator wants under performing asset management companies to stop charging fees from investors, in a controversial move aimed at protecting the interests of mutual fund buyers. The fund managers must justify their performance and fees for schemes that have consistently failed to perform. SEBI has also asked AMCs to explain why they do not wind up non-performing schemes before they launch a new one and has refused to clear applications for launching new funds by asset managers that have non-performing schemes.
Many AMCs are planning their next series of Rajiv Gandhi Equity Savings Scheme (RGESS) but this time in an open-ended avatar so that the product could be available to investors right through the year. AMCs like LIC, UTI etc. have approached SEBI to give them the go ahead for launching open-ended variants of RGESS. Currently, as per RGESS notification only closed end or FTFs structures are possible. The listing and demat requirements stipulated in the notification are deterrents to the launch of open-ended RGESS. The open-ended structure allows them to market the fund more effectively.

Distributors wanting to either opt in or opt out of transaction charge (TC) have to inform CAMS. The first window of changing the status on transaction charge for distributors ends on March 25, 2013. The next window starts after six months from September 1 to September 25, 2013.  The transaction charge was initially allowed to be levied on all types of products and later in September 2012, SEBI allowed distributors to charge TC based on the type of the product. Many distributors faced operational difficulties in charging for debt funds. Now distributors have a choice to opt in or opt out of TC from 11 scheme categories. The option exercised for a particular category of scheme is applicable across all fund houses. AMFI shares the status of distributors regarding TC with all fund houses. In order to prevent unfair practice, AMFI has warned distributors against splitting applications to earn more transaction charge. In 2011, around 6000 distributors were estimated to have opted in for TC.

According to a SEBI circular, mutual fund houses are required to label products from July 1, 2013. The regulator feels that it would provide investors an easy understanding of the kind of product/scheme they are investing in and its suitability to them.  SEBI has taken this move to curb mis-selling. The AMCs are supposed to mention the level of risk, depicted by colour code boxes - blue colour coded box would indicate low risk, yellow would signify a medium risk, while brown would represent schemes with high risk. The fund houses are also supposed to mention the nature of scheme, such as short/medium/long term and a singled sentenced brief on the kind of product – equity/debt. The labeling is supposed to be printed on the front page of initial offering application forms, KIM, SID and in common application form along with the information about the scheme.  In the scheme advertisements, the labeling is to be placed in a manner so that it is prominently visible to investors. The fund house should also print a disclaimer to the effect that investors should consult their financial advisers if they are not clear about the suitability of the product.

Market regulator SEBI has invited applications for those who wish to become self-regulatory organization (SRO) for mutual fund distributors. According to SEBI rules, any group or association of intermediaries, which wants to become a SRO has to form a company registered under section 25 of the Companies Act, 1956. The SRO formed to regulate investment advisors will be registered under the SEBI (Self-Regulatory Organization) Regulations, 2004. SRO will have sufficient resources to perform its functions. Its duties would include registering and setting minimum professional standards, including certification of investment advisors, laying down rules and regulations and enforcing those; informing and educating the investing public; setting up and administering a disputes resolution forum for investors and registered entities etc. Persons desirous of registration as Investment Advisors shall obtain registration with the SRO established for the purpose. The SRO will be entitled to charge a fee for granting registration and an annual fee company under the Companies Act. Among others, the applicant should have a minimum net-worth of Rs one crore and have adequate infrastructure to enable it to discharge its functions as a SRO. Besides, the directors of the applicant entity would need to have professional competence, financial soundness and general reputation of fairness and integrity to the satisfaction of SEBI. In addition, the applicants and their directors must not be involved in legal proceedings connected with the securities market or have any conviction for an economic offence. According to the norms, the certificate of recognition as an SRO would be valid for a period of five years.

The Budget 2012-13 has liberalised the Rajiv Gandhi Equity Savings Scheme. Investors up to an annual income of Rs 12 lakh (Rs 10 lakh earlier) will be able to invest for 2 more years continuously. Earlier, they were allowed to invest for one time only.

The Budget has streamlined inflow from QFIs and different classes of portfolio investors and permitted Pension Funds (including NPS) and Provident Funds to invest in debt schemes of Mutual Funds. Pension and provident funds will be able to invest in equity markets through ETF route.

AMFI registered mutual fund advisors have been allowed to become brokers on Stock Exchanges for Mutual Fund division.

Securities Transaction Tax (STT) has been reduced on Exchange Traded Funds (ETFs) to 0.001%. Reduction in STT helps in the reduction of transaction cost, which in turn helps the schemes to perform better on the returns front.

Dividend distribution tax (DDT) paid by non-liquid debt funds has been increased to 25% from 12.5%. Over and above this, there is an education cess as well as a surcharge, which has been hiked from 5% to 10%. These ultra short-term funds are primarily used by individuals for parking their short-term funds. Typically what happens here is that one get higher returns compared to the savings bank account and the returns are also more tax efficient.

The Budget 2012-13 has brought clarity to the tax provisions relating to securitisation. This will help mutual funds to enter into securitisation deals.

Until further clarity, Direct Tax Code (DTC) is being put on hold. So, Equity Linked Savings Schemes (ELSS) will remain a tax saving option for the investors.

However there were some expectations from the budget as far as the mutual fund industry is concerned which were not realized. It was expected that the government would increase the limit of sec 80 C in order to accommodate higher investment in tax saving mutual fund schemes. This would have helped to mobilise household savings and channelize the same. It was also expected that the capital gain tax on the merged scheme would be done away with. However, there has been no announcement with regard to this. Investors have to pay tax on the schemes, which have been merged into one as it resulted in exit from one i.e. registered as a sale transaction even though it is combined. This notwithstanding, several path-breaking reforms have been brought about in the mutual fund arena that have changed the landscape of the mutual fund industry.

Monday, March 18, 2013


March 2013

NFO Collections – from a mammoth to a mole!

Gone are the days when a fund collected Rs 5000 to Rs 6000 crore from its NFO. Only 12 equity funds have been able to collect Rs 100 crore each or in excess of that since 2010. A host of reasons are responsible for this slowdown. Lack of new investment themes, completed product basket, uncertain markets, slash in marketing budgets, distributor’s unwillingness to sell new funds, and regulatory curbs like SEBI’s reluctance to clear similar looking funds have made the AMCs hit the stop button on new fund launches. Data provided by Value Research shows that a total of 48 funds have been launched since 2010 but only a handful of them have been able to attract the interest of distributors and investors. DSP Black Rock Focus 25, launched in April 2010, tops the chart, collecting Rs 478 crore, followed by SBI PSU Fund launched in May 2010, which collected Rs 442 crore. The third fund on the list of top NFO mobiliser is HSBC Brazil Fund, which mopped up Rs 313 crore. In 2012, only one fund - Axis Focus 25 Fund managed to collect a respectable Rs 250 crore from 16000 albeit with a lot of support from Axis Bank. A few funds have had to make do with modest collections in the range of Rs 1 crore to Rs 10 crore. 

With the markets looking up, the March 2013 NFONEST sports a spicy variety, notwithstanding paltry NFO collections.

ICICI Prudential Nifty ETF

Opens: March 1, 2013
Closes: March 18, 2013

ICICI Prudential Nifty ETF, an open-ended index exchange traded fund, aims to provide returns before expenses that closely correspond to the total return of the underlying index, subject to tracking errors. Units issued under ICICI Prudential Nifty ETF qualify to be eligible security under Rajiv Gandhi Equity Savings Scheme, 2012. The investment objective of the fund is to allocate 95% to 100% of assets in securities of companies constituting CNX Nifty Index (the underlying index) with medium to high-risk profile. On the flipside, it will allocate up to 5% of assets in money market instruments having residual maturity up to 91 days with low to medium risk profile. The fund's performance will be benchmarked against CNX Nifty. The fund will be managed by Kayzad Eghlim.

Birla Sunlife RGESS Series I

Opens: February 25, 2013
Closes: March 20, 2013

Birla Sun Life Rajiv Gandhi Equity Savings Scheme-Series 1 (BSL RGESS - Series 1) is a 3-year close-ended equity mutual fund eligible under Rajiv Gandhi Equity Savings Scheme (RGESS) 2012. The fund offers both - first time and existing equity investors across the country, an opportunity to participate in India's expected robust economic growth, through investment in blue chip companies which are a part of BSE-100, CNX-100, and Public Sector Enterprises (PSE) categorised as Navratnas, Maharatnas, and Miniratnas as per the Central Government. Categorised under tax savings solutions of Birla Sun Life Mutual Fund, BSL RGESS - Series 1 will invest in a mix of top 100 listed companies of India and quality PSE stocks to create a diversified portfolio of securities. The objective will be to identify business with superior growth prospects and strong management available at reasonable valuation and offering higher risk adjusted returns. The fund will allocate 95% to 100% of assets in equity securities specified as eligible securities for RGESS with medium to high-risk profile. On the other side, it will allocate up to 5% of assets in cash and cash equivalents and money market instruments. Benchmark index for the fund will be CNX 100. The fund manager for Birla Sun Life Rajiv Gandhi Equity Savings Scheme - Series 1 is Mr. Nishit Dholakia who manages Birla Sun Life Dividend Yield Plus, Birla Sun Life Pure Value Fund, and Birla Sun Life '95 Fund (jointly managed with Mr. Prasad Dhonde). The fund manager will primarily focus on long-term growth for identifying stocks. The fund will follow a blend of bottom up approach (for stock selection) and top down approach (for sector allocation).

ICICI Prudential Multi Yield Series 3 Plan A

Opens: March 11, 2013
Closes: March 20, 2013

ICICI Prudential Multi Yield Series 3 Plan A is a close-ended aggressive Monthly Income Plan (MIP). The primary objective of the fund is to seek to generate income by investing in a portfolio of fixed income securities/ debt instruments. The secondary objective of the fund is to generate long term capital appreciation by investing a portion of the fund's assets in equity and equity related instruments. The Benchmark Index of the fund is CRISIL MIP Blended Fund. The fund managers are Rajat Chandak and Rahul Goswami.

JP Morgan India Hybrid Fund Series 2

Opens: March 11, 2013
Closes: March 22, 2013

JP Morgan India Hybrid Fund Series 2 is a closed ended hybrid fund that will invest in a mix of equity and debt. The fund has a tenure of 1025 days. The fund will aim to generate returns by containing the interest rate volatility. The fund will invest at least 65% of the assets in fixed income securities and the equity allocation is restricted to maximum 35%. The fund will allocate 65% to 95% of assets in debt securities and Government of India Securities with low to medium risk profile and up to 30% in money market instruments with low risk profile. On the other side, it will allocate 5% to 35% of assets in equity and equity related instruments with medium to high-risk profile. 48% to 53% of net assets will be invested in AAA rated non-convertible debentures and 30% to 35% of net assets will be invested in AA rated non-convertible debentures. The performance of the fund will be compared with an artificial benchmark comprising 90% of CRISIL Short Term Bond Fund Index and 10% of BSE 200. Namdev Chougule, Ravi Ratanpal, Amit Gadgil, and Karan Sikka are the fund managers.

IDFC Banking Debt Fund

Opens: February 26, 2013
Closes: March 26, 2013

IDFC Banking Debt Fund, an open-ended income fund aims at generating stable returns with a low risk strategy by creating a portfolio that is invested in debt and money market instruments issued by scheduled commercial banks. The fund will allocate 80% to 100% of assets in debt and money market instruments of scheduled commercial banks. On the other hand, it will allocate up to 20% of assets in CBLO, Repo, T-Bills and Government Securities. The performance of the fund will be benchmarked against CRISIL Short Term Bond Fund Index. The fund will be managed by Mr. Anupam Joshi.

JP Morgan India Hybrid Fund Series 3, HDFC Ultra Short-term Opportunities Fund, Tata Dual Advantage Fund (Schemes A to D), Reliance RGESS Fund, Axis Money Market Fund, Peerless RGESS Fund, DSP BlackRock Dual Advantage Fund Series 16 to 20, Reliance R* Shares Nifty ETF, and ICICI Prudential RGESS Series 1 to 5 are expected to be launched in the coming months. 

Monday, March 11, 2013

March 2013

High returns at minimal risk 
Who would not want to get high returns with minimal risk? Now the next question that arises is how is it possible to earn high returns while bearing low risk. Here Arbitrage Funds emerge as the apt answer. Arbitrage Funds basically try and cash in on the price variation of the same security in different markets. Equity investments fetch high returns but have high risk factor also attached with them. The dividend income from equity investments and long-term capital gains are tax-free. Arbitrage funds are attractive, as they behave like debt funds but the tax treatment for them is like that of equity funds.

All the GEMs that figured in the March 2012 GEMGAZE have retained their esteemed position in the March 2013 GEMGAZE also.


UTI SPREAD Fund is a seven-year old five star fund with an AUM of a paltry Rs 27 crore. One of the best performing arbitrage funds, its average out performance has always been higher (average of 22 basis points) than that of the underperformance (4 basis points). That is definitely a reward for its bold stance that often goes against the general market trend. Its one-year return of 8.61% is lower than its category average of 9.78% at present. 27% of the portfolio is in equities, with services, energy, and engineering being the top three sectors. The entire assets allocated to equity are in 8 stocks. 24% of the assets are in debt with 49% in cash. The steep slide in allocation to equity compared to last year can partially explain the deterioration in one-year return. 20% of the portfolio is in large caps. While the portfolio turnover ratio is a massive 870.1%, the expense ratio is very low at 1%, an icing on the cake, indeed. The fund is benchmarked against the CRISIL Liquid Fund index. The fund has been managed by Mr.Harsha Upadhyaya since December 2006. 

HDFC Arbitrage Fund Gem

In its five-year old existence, HDFC Arbitrage Fund has been able to reach an AUM of a mere Rs 28 crore. This fund's trump card has been its resilience in a falling market. The one-year return of the fund is 8.95% as against the category average of 9.78%. There has been a sea change in the sector preference of this fund. The finance sector has occupied the top slot toppling healthcare sector to the fourth position. The sectors that come second and third in preference are energy and FMCG. Top 5 holdings constitute 33% of the portfolio. Equities constitute 69% of the portfolio with 48% in large cap stocks. The portfolio has 30 stocks and the portfolio turnover ratio is 51.94%. The expense ratio is as low as 0.87%. The fund is benchmarked against the CRISIL Liquid Fund Index and has been jointly managed by Mr. Anil Bamboli and Mr. Anand Laddha. Both have around 10 years of experience in research.

Kotak Equity Arbitrage Fund Gem

Incorporated in September 2005, Kotak Equity Arbitrage Fund has an AUM of Rs 124 crore. The one-year return of the fund is 9.74% as against the category average of 9.78%. The top three sectors are finance, services, and diversified, with large caps constituting 40% of the portfolio. Top five holdings constitute 32% of the portfolio, with the equity exposure continuing to be nil and debt constituting 32% of the portfolio. The portfolio turnover ratio is 189.41% and the expense ratio is 0.95%. The fund is benchmarked against the CRISIL Liquid Fund Index with Abhishek Bisen and Deepak Gupta efficiently managing the fund.
JM Arbitrage Advantage Fund Gem

The Rs 23 crore JM Arbitrage Fund, incorporated in 2006, has earned a 1-year return of 9.79% beating the category average return of 9.78%. Top five holdings constitute 41 % of the portfolio with finance, energy, and services forming the top three sectors. Equity constitutes 59% of the portfolio with 54% in mid and small cap stocks. There are 16 stocks in the portfolio. The portfolio turnover ratio is very low at 18.21%. The expense ratio is 1%. The fund is benchmarked against the CRISIL Liquid Fund Index. The fund is managed by Chaitanya Choksi.
SBI Arbitrage Opportunities Fund Gem

SBI Arbitrage Opportunities Fund, incorporated in October 2006, has an AUM of Rs 40 crore. Its one-year return is 9.63 %, a tad less than the category average return of 9.78%. The top five holdings constitute 41% of the portfolio. Services, metals, and finance are the top three sectors. 70% of the portfolio is made up of equity with 47% in large cap stocks. There are 19 stocks in the portfolio with a very high portfolio turnover ratio of 931%. The expense ratio is very high at 2.08%. The fund is benchmarked against the CRISIL Liquid Fund Index. The fund is managed by Suchita Shah.

Monday, March 04, 2013


March 2013

he long and short of …

For most investors the darkest deterrent of a stock market is “volatility”. Here is a fund, that offers cushion against market ups and downs in the near to medium term. If you are an investor who can take moderate to low risk, Arbitrage Funds could serve you in this regard. An arbitrage fund follows a strategy of buying and selling similar and equal securities simultaneously from at least two different markets. It takes advantage of the mispricing between two markets thus hedging against risk. The profit would be the difference between the prices of the instrument in different markets.
Let us consider the stock of ABC Ltd, which is being traded in the equity market as well as the derivative market at Rs. 500 and Rs 520 respectively. The arbitrage transaction could involve buying ABC Ltd. shares at Rs 500 per share in the equity market. At the same time, share of ABC Ltd. would be sold in the futures market, at Rs 520. On the expiry date of the futures contract, the price of the equity shares and the stock futures, tend to coincide. These two transactions can be offset by buying the contract in the futures market and selling the shares in the equity market. Suppose, on this date, the share price is Rs 530, a profit of Rs 30 (Rs 530 - Rs 500) per share is made in the equity market and a loss of Rs 10 (Rs 520 - Rs 530) is made in the derivative market. The net gain is Rs 20. If the share price falls to Rs 470, a loss of Rs 30 in the equity market and a profit of Rs 50 in the futures market are made. Again, the net gain is Rs 20. Irrespective of whether the share price of ABC Ltd. has risen or fallen the profit remains the same. As both the buying and selling transactions offset each other, they are not affected by market movements.
…beating market volatility with Arbitrage Funds

The volatility in the markets is something Arbitrage funds breed on. This is a favourable time for investors of arbitrage funds given the increased volatility in the stock market. Besides, fund houses have installed computerised systems and processes, which help them spot arbitrage opportunities in advance.

AUM abatement to the rescue

Another factor that is currently working in favour of investors is the fall in assets under management (AUM) in most arbitrage funds over the years. How does this help the funds' performance? Arbitrage opportunities are limited, so the more the number of players, stronger the competition to take advantage of the opportunities, which, in turn, dilutes the returns of the funds. During their heyday in 2006-08, arbitrage funds generated better returns than debt products and this attracted large sums of money into the category. Fund houses also launched new arbitrage funds, increasing the competition. Since all arbitrage funds were fighting for the same set of opportunities, the category performance suffered and investors deserted the funds. This resulted in the average AUM of several schemes falling below Rs 1 crore. Currently, there are only nine arbitrage funds with an AUM of more than Rs 25 crore, with Kotak Equity Arbitrage Fund having the largest corpus of Rs 125 crore.

Will history be repeated? Yes it may. If money starts pouring into these funds and they grow to much bigger levels, the performance of arbitrage funds could suffer. So, if you plan to invest in an arbitrage fund, you should keep a close watch on the category size. You can enter these funds anytime and not worry where the market is headed. Since these funds invest predominantly in equities, they are treated like equity-oriented mutual funds and have identical tax treatment. They attract a lower short-term capital gain tax of 10% and become completely tax-free if you hold them for a period exceeding one year. Arbitrage funds are best equipped to deliver in volatile times when there is enough arbitrage opportunity.


There are 15 funds in India that use arbitrage strategies to generate returns. With an average return of nearly 9% in the last one year, arbitrage funds outdid diversified funds in a volatile market, although their long-term performance lacks lustre. Over the last one-, three- and five-year periods, the average returns generated by arbitrage funds were 8.15%, 7.08% and 7.02% respectively. Funds such as ICICI Prudential Blended Plan - Option A, IDFC Arbitrage - Plan A (Regular), JM Arbitrage Advantage, Kotak Equity Arbitrage, Reliance Arbitrage Advantage, and SBI Arbitrage Opportunities returned more than 9% over the last one year, taking advantage of market volatility.
A mixed bag

Though marketed as risk-free investments by most fund houses, investors’ reactions have been mixed. Theoretically, these funds use the price difference between the equity and derivative markets to generate results. However, in reality, like all mutual funds, arbitrage funds have managed to generate high profits, mostly when the market has been in a rally. For debt fund investors, arbitrage funds could prove to be a better option due to its tax benefit. No investment is totally risk-free. Understand the risks involved before taking the plunge.