FUND FULCRUM

March 2014

Mutual fund industry’s assets under management reached a record high of Rs. 9.16 lakh crore in February 2014 from Rs. 9.03 lakh crore in January 2014 on the back of inflows in income funds, according to the latest AMFI data. Income funds or fixed maturity plans received net inflows of Rs. 12,955 crore. The industry launched 128 FMPs which mopped up Rs. 21,307 crore while gross redemptions stood at Rs 30,812 crore which resulted in net inflows of Rs. 12955 crore. Fund houses typically launch long tenure FMPs during February and March, which if held for more than one year by investors, offer double indexation benefits. Income funds constitute Rs. 4.47 lakh crore or 47% of the industry’s total AUM of Rs. 9.16 lakh crore. The AUM of equity funds went up from Rs. 1.52 lakh crore to Rs. 1.57 lakh crore due to mark to market gains. The S&P BSE Sensex gained 606 points in February 2014. Gold ETFs continued to see redemptions in February 2014. The category saw net outflows of Rs. 178 crore. There are 14 Gold ETFs in the industry with assets under management of Rs. 9330 crore. ETFs linked to other indices also saw net outflows of Rs. 19 crore.

Investors have pumped in more than Rs 1.6 lakh crore in various mutual fund schemes in the first ten months of the ongoing financial year, more than double the amount infused by them in the entire financial year 2012-13. According to the latest data available with SEBI, there was a net inflow of Rs 1,59,631 crore during the 2013-14 fiscal (April-January) as against over Rs 76,000 crore in the preceding fiscal. Prior to that, a net amount of more than Rs 22,000 crore and over Rs 49,000 crore moved out of the mutual funds' kitty during 2011-12 and 2010-11, respectively. At a gross level, mutual funds mobilised over Rs 81.4 lakh crore during the April-January period of 2013-14, while there were redemptions worth Rs 79.8 lakh crore as well. This resulted in a net inflow of Rs 1,59,631 crore. Of the total net investment made in the first ten months of this fiscal, the huge part of inflows in the mutual fund schemes came during April and May 2013. Investors have infused a net amount of Rs 1.44 lakh crore during the period. In April 2013, mutual funds mobilised around Rs 1.08 lakh crore in various schemes. This was the highest net inflow by investors in such schemes in a single month since April 2011, when investors had put in a whopping Rs 1.84 lakh crore.

The mutual fund industry lost close to 30 lakh folios during April 2013 till February 2014, according to the latest SEBI data. A majority of this decline was due to rapid fall in equity folios. Equity funds lost more than 36 lakh folios during the same period due to redemptions and folio consolidations. Equity folio counts dropped from 3.31 crore in March 2013 to 2.95 crore in February 2014. Equity funds account for 74% of industry’s total 3.98 crore folios. With equity markets scaling new high, investors are looking for every opportunity to cash out of equity funds. This is evident from the Rs. 7333 crore net outflows during April-February 2014. The industry clocked sales of Rs. 39,417 crore during the same period while investors redeemed Rs. 46,751 crore which resulted in a net outflow of Rs. 7,333 crore. While the industry is reeling under unabated redemptions, new equity fund launches brought some relief for the industry. Fund houses launched 17 equity funds (open-end and close-end) during April-February 2014 which mopped up Rs. 1,995 crore. Majority of these were close-end funds. With interest rates remaining at peak, debt funds continued to attract investors. More than six lakh folios were added in debt funds category. Investors poured in Rs. 1.73 lakh crore in debt funds during April-February 2014. Inflows in debt funds helped the industry’s assets under management reach new high at Rs. 9.02 lakh crore in February 2014 from Rs. 7.94 lakh crore in March 2013. Exchange traded funds which comprise of Gold ETFs and Other ETFs tracking equity indices lost 66590 folios. Majority of folio erosion was seen in the Gold ETFs which saw net outflows of Rs. 2145 crore. ETFs currently manage AUM of Rs. 10,585 crore. Apart from the above categories, fund of funds which invest in overseas and balanced funds saw growth in number of folios.

Piquant Parade

 

The Bombay Stock Exchange (BSE) launched a mutual fund transaction platform called BSE StAR MF on March 6, 2014, which allows independent financial advisors or mutual fund distributors to directly buy and sell fund units on the stock exchange. They can even register systematic investment plans (SIPs) for their clients on this platform. The platform launched in December 2009 was only open to BSE brokers. Earlier, a mutual fund distributor had to become a sub-broker with any broker to use StAR MF platform. Around 300 distributors, including 65 IFAs, have taken membership of BSE StAR MF platform so far. In October 2013, BSE started giving limited membership to mutual fund distributors for a fee of Rs. 15000.

 To bolster awareness among investors and protect them from possible frauds, capital markets regulator, SEBI, plans to seek additional funds from the government for strengthening its IPEF (Investor Protection and Education Fund) programmes. SEBI has identified empowerment of investors, strengthening of enforcement and supervision framework and capacity building as among its core focus areas for 2014-15. With expenses towards various investor protection and education initiatives estimated to be nearly Rs 55 crore for next fiscal, SEBI may seek board's approval for additional funding for IPEF. Investor Protection and Education Fund (IPEF), set up by SEBI, had a corpus of Rs 35 crore at the end of January 2014. The SEBI board is also expected to consider a significant revision in fee charges from various entities so as to meet expenses for its regulatory and investor-centric activities. Meanwhile, SEBI wants to recover legal expenses incurred in such litigations from penalties imposed by it on defaulters before crediting the same to the government's coffers. The watchdog incurred litigation expenditure in the range of Rs 4-5 crore in each of the past three financial years and the same could be higher this fiscal.

Regulatory Rigmarole

 

Under its new long-term policy for mutual funds, which has been approved by the SEBI board and will soon be made public, the fund houses would be asked to enhance the online investment facility and tap the Internet savvy users to invest in mutual funds. At present, many fund houses are offering facility for online investment, but SEBI said that there is a need to promote and make it more user friendly for investors by improving the infrastructure and efficiencies. The regulator would also ask mutual fund players to tap burgeoning mobile-only Internet users for direct distribution of investment products.

In order to increase penetration of mutual fund products and to energise the distribution network, the Securities and Exchange Board of India has suggested that all PSU banks be encouraged to distribute schemes of all mutual funds. Apart from traditional banking products, PSU banks have been very successful in distributing third party insurance products. However, the same success is not reflected in the case of mutual funds. PSU banks which have wide bank branches network and best distribution reach in the nook and corner of the country, could play a key role in mutual fund distribution.

Investors might soon be allowed to buy in cash, mutual funds worth up to Rs 50,000, without declaring their Permanent Account Number (PAN). The increase in cap will lower the disadvantage faced by mutual funds vis-a-vis insurance products but not bring in a level playing field, as there is no cash limit for investing in insurance products. In addition, according to the income-tax rules, if an investment in financial instruments exceeds Rs 50,000, the investor is required to furnish PAN. So, the information will go to the I-T department, which could, potentially, ask the investor to reveal the source of this money.

The Securities and Exchange Board of India has decided to stop providing financial assistance to class action suits. Henceforth, investor associations wishing to file class suites should approach the Centre through the Ministry of Corporate Affairs (MCA). SEBI’s move might make it difficult for investors looking for legal aid. SEBI had introduced the regulation in 2009 by which, its Investor Protection and Education Fund could be utilised towards “aiding investors’ associations recognised by the Board to undertake legal proceedings in the interest of investors in securities that are listed or proposed to be listed”.

In a bid to counter money laundering and terrorist financing in the capital market, SEBI has asked intermediaries like brokers, sub-brokers, and mutual fund distributors to carry out risk assessment of their clients. As a part of this compliance, intermediaries will have to assess the country, nature and volume of transactions, payment methods used by clients, etc.  Intermediaries have to identify whether the client is acting on behalf of a beneficial owner. This task can be outsourced to a third party. The third party has to be supervised and should have measures in place for compliance with client due diligence (CDD) and record-keeping requirements in line with the obligations under the PML Act. The regulator has clarified that intermediaries will be ultimately responsible for client due diligence (CDD). Client records of the identity of clients, beneficial owners as well as account files and business correspondence will now have to be kept for five years after the business relationship between a client and intermediary has ended instead of ten years earlier. Registered intermediaries will have to preserve the records of information related to transactions which are reported to the Financial Intelligence Unit India (FIU-IND) for a period of five years from the date of the transaction between the client and the intermediary. FIU-IND can penalize the Designated Director for failure of the intermediary to comply with any of its anti-money laundering/combating financing terrorism (AML/CFT) obligations. To monitor compliance with these rules, intermediaries will have to appoint a Designated Director. The Designated Director can be Managing Director or a Whole-time Director in case of a company, managing partner in case of partnership firm, proprietor in case of a proprietorship concern, managing trustee in case of a trust. In case of mutual funds, compliance of these rules has to be monitored by the Boards of the Asset Management Companies and the Trustees and in case of other intermediaries, by their Board of Directors.

The SEBI board recently approved a long-term policy for mutual funds in India. The objectives were to ensure sustainable growth of the mutual fund industry and mobilisation of household savings for the growth of the economy. Why do these objectives remain unfulfilled even as the oldest mutual fund celebrates its 50 years? With the shift in financing pattern from centrally funded institutions to securities markets, the government should have acknowledged SEBI's construct of mutual funds as an efficient intermediary, and done two things. First, mutual funds should have been allowed to manage all portfolios of securities— pension funds, insurance portfolios, and every portfolio that holds securities and, hence, needs a manager. Second, the need to channelise household savings to fund the economy's long-term needs should have been backed by tax incentives for investing via mutual funds. In several regimes, including the US, a large chunk of the retail household money available to mutual funds is the mandatory retirement saving that enjoys tax concessions. Sebi is proposing a new retirement-linked product and an additional tax deduction under Section 80C. The amount allowed in tax-saving equity mutual funds has gone up from Rs 10,000 in 1991 to Rs 1 lakh. Equity assets of mutual funds have not moved up in the same proportion. Section 80C is crowded with choices, while retirement plans of retail investors remain underfunded in debt products.

NFO NEST

March 2014

Flurry of FMPs

Fund houses are rushing to launch FMPs as investors are looking to take advantage of double indexation benefit from longer tenure FMPs. As many as 40 FMPs are currently open for subscription. High interest rates, excessive supply of FMPs and lack of liquidity are posing a challenge for some fund houses to raise money in FMPs. Recently some fund houses had to extend the NFO period as they could not raise the mandatory Rs. 20 crore in their FMPs. According to rough industry estimates, Rs. 1 lakh crore has matured from FMPs in the last few months, which is likely to flow back into the system. Rs. 10,000 crore to Rs. 15,000 crore is expected to flow into FMPs in March 2014. The industry had collected Rs. 21,581 crore in March 2013. Typically a lot of high net worth investors invest in FMPs in March to take advantage of double indexation benefits. There is a good appetite for both short term and long term FMPs.  Some fund houses do not launch FMPs as these are not very high margin products. Fund houses have to compete on wafer thin margins by keeping expense ratios low in order to offer superior returns.  Except Franklin Templeton, Quantum, and PPFAS most fund houses launch FMPs. FMPs may lose their sheen if direct tax code (DTC) is implemented. The tax arbitrage between FMPs and fixed deposits will also diminish. If held for more than one year, income from FMPs is treated as long term capital gains which is taxed at 10% or 20% with indexation whereas the income from fixed deposits is taxed as per the nominal income tax rate. This is set to change under DTC as gains from FMPs will be added to the income and taxed at the nominal rate.

Birla Sun Life Focused Equity Fund – Series 2

Opens: February 26, 2014

Closes: March 19, 2014

 

Birla Sun Life Focused Equity Fund Series 2 is a close ended equity fund investing in eligible securities as per Rajiv Gandhi Equity Savings Scheme, 2013, as amended from time to time. The objective of the fund is to generate capital appreciation, from a portfolio of equity securities specified as eligible securities for Rajiv Gandhi Equity Savings Scheme, 2013 (RGESS) (95% – 100%) medium to high risk profile and Cash and Cash Equivalents (cash and bank balance or overnight investment in CBLO, reverse repo) and Money Market Instruments (0% – 5%) low to medium risk profile. The fund is benchmarked against CNX 100. The fund will be managed by Anil Shah.

HDFC Corporate Debt Opportunities Fund

Opens: March 6, 2014

Closes: March 20, 2014

 

HDFC Corporate Debt Opportunities Fund is an open ended income fund. The investment objective of the fund is to generate regular income and capital appreciation by investing predominantly in corporate debt. The fund is benchmarked against CRISIL Short Term Bond Fund Index. The fund will invest up to 100% in debt and money market instruments excluding medium government securities and state development loans. Investments in securitised debt, if undertaken, shall not exceed 50% of the net assets of the fund. The fund shall not invest in Government securities and State Development Loans. The fund shall not undertake repo / reverse repo transactions in Corporate Debt Securities. The fund will be managed by Rakesh Vyas and Shobhit Mehrotra.

 

IDBI Diversified Equity Fund

Opens: March 10, 2014

Closes: March 24, 2014

IDBI Diversified Equity Fund is an open ended diversified equity fund. The fund will provide investors with opportunities for long-term growth in capital through investment in a diversified basket of equity stocks, debt, and money market. The equity portfolio will be well-diversified and actively managed to realize the fund objective. Benchmarked against S&P BSE 500, IDBI Diversified Equity Fund will invest in fundamentally strong companies having investment merits like competitive position in market, potential earnings growth, good management quality, etc. The fund will follow a combination of growth as well as value picking. However, more weightage will be given to growth picking strategy. The fund is designed to capture mispriced opportunities in the market since valuations are very cheap at the moment. The fund will select stocks on the basis of quantitative and qualitative analysis. While quantitative factors involve companies showing improvement in margin and having reasonable or manageable debt, qualitative factors will track companies with high corporate governance and strong market position. The fund will be managed by Mr. V. Balasubramanian.

ICICI Prudential Multiple Yield Fund – Series 6 – Plan B

Opens: March 11, 2014

Closes: March 24, 2014

ICICI Prudential Multiple Yield Fund - Series 6 - Plan B is a close ended income fund. The primary objective of the fund is to seek to generate returns 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 fund will allocate 75% to 95% of assets in debt securities (including government securities) with low to medium risk profile. It would allocate up to 20% of assets in money market instruments, cash and cash equivalents with low to medium risk profile. On the flip side, it would allocate 5% to 30% of the asset in equity or equity related securities with medium to high risk profile. The investments in debt instruments, 82% to 87% would be invested in AA rated non convertible debentures. The benchmark index for the fund will be CRISIL MIP Blended Index. The fund will be jointly managed by Rahul Goswami, Aditya Pagaria (debt portion), Rajat Chandak (equity portion) and investments under the ADRs/GDRs and other foreign securities will be managed by Abhishek Pathak.

R* Shares Consumption Fund

Opens: March 14, 2014

Closes: March 28, 2014

 

R* Shares Consumption Fund is an Open Ended Index Exchange Traded Fund.  The investment objective of the fund is providing investment returns that, before expenses, closely correspond to the total returns of the securities as represented by the securities constituting CNX Consumption Index (95% – 100%) with Medium to High risk profile and Money Market instruments including CBLO (with maturity not exceeding 91 days) and liquid schemes of Mutual Fund (0% – 5%) with Low to Medium risk profile subject to tracking errors. The performance of the fund will be standardized against CNX Consumption Index and Krishan Daga will be the fund manager.

SBI Dynamic Asset Allocation Fund, Goldman Sachs CPSE Exchange Traded Fund, Edelweiss Arbitrage Fund, Axis Opportunities Fund Series I & II, Axis Inflation Indexed Bond Fund, SBI Inflation Indexed Bond Fund, SBI Debt Fund Series A - 26-50, Kotak India Growth Fund Series I & II, ICICI Prudential Capital Protection Oriented Fund Series VI, and Birla Sun Life Capital Protection Oriented Fund Series 21 to 24 are expected to be launched in the coming months. 

GEMGAZE

March 2014

 Volatility – a boon to arbitrage funds

 

With volatility in the stock markets rising higher, one class of mutual funds - arbitrage funds - is doing really well. In the past one year, the National Stock Exchange's (NSE) volatility index (VIX) is up 28%. Arbitrage funds have returned slightly over 9% in the same period. In comparison, the BSE Sensex returned around 8% and Nifty 5.5%. While the markets remained volatile for most part of the past year, in the past couple of months they have done well. The Sensex gained 19% from its year-low of 17905.91 on August 21, 2013. But volatility is on the rise, and going forward, volatility could remain at elevated levels due to big events such as the US taper and central government elections. Further, interest rates have also been rising, and that is giving rise to more arbitrage opportunities.

All the GEMs that figured in the March 2013 GEMGAZE have retained their esteemed position in the March 2014 GEMGAZE also.

UTI SPREAD Fund Gem

UTI SPREAD Fund is an eight-year old fund with an AUM of a paltry Rs 21 crore. Its one-year return of 7.87% is lower than its category average of 9.13% at present. 59% of the portfolio is in equities, with energy, finance, and healthcare being the top three sectors. The entire assets allocated to equity are in 13 stocks and 26.87% of the assets are in debt with 14% in cash. While the portfolio turnover ratio is a massive 870%, the expense ratio is very low at 1.03%, an icing on the cake, indeed. The fund is benchmarked against the CRISIL Liquid Fund index. The fund has been managed by Kaushik Basu since July 2011. 

HDFC Arbitrage Fund Gem

In its six-year old existence, HDFC Arbitrage Fund has been able to reach an AUM of a mere Rs 29 crore. This fund's trump card has been its resilience in a falling market. The one-year return of the fund is 8.4% as against the category average of 9.13%. The finance sector occupied the top slot with energy and FMCG in the second and third positions. Top 5 holdings constitute 31% of the portfolio with equities constituting 67% of the portfolio. The portfolio has 23 stocks and the portfolio turnover ratio is 70%. The expense ratio is as low as 0.96%. 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 484 crore. The one-year return of the fund is 9.25% as against the category average of 9.13%. The top three sectors are finance, healthcare, and technology. Top five holdings constitute 38% of the portfolio, with the equity exposure continuing to be nil and debt constituting 33% of the portfolio. The portfolio turnover ratio is 233% and the expense ratio is 0.92%. 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 61 crore JM Arbitrage Fund, incorporated in 2006, has earned a one-year return of 9.17% beating the category average return of 9.13%. Top five holdings constitute 45% of the portfolio with finance, FMCG, and healthcare forming the top three sectors. Equity constitutes 68% of the portfolio with 54% in mid and small cap stocks. There are 36 stocks in the portfolio. The portfolio turnover ratio is very high at 870%. The expense ratio is 0.84%. The fund is benchmarked against the CRISIL Liquid Fund Index. The fund is managed by Chaitanya Choksi since February 2011.

SBI Arbitrage Opportunities Fund Gem

SBI Arbitrage Opportunities Fund, incorporated in October 2006, has an AUM of Rs 109 crore. Its one-year return is 9.15%, a tad higher than the category average return of 9.13%. The top five holdings constitute 48% of the portfolio. FMCG, finance, and diversified are the top three sectors. 70% of the portfolio is made up of equity with 47% in large cap stocks. There are 25 stocks in the portfolio with a very high portfolio turnover ratio of 575%. The expense ratio is comparatively high at 1.28%. The fund is benchmarked against the CRISIL Liquid Fund Index. The fund is managed by Neeraj Kumar since October 2012.

 

FUND FLAVOUR

March 2014

 

Is there any mutual fund in the market with features like safety combined with better taxation? Yes. It is called Arbitrage Fund. Arbitrage fund is an equity based mutual fund which provides consistent performance like debt mutual funds, but is taxed like equity mutual funds. It means, you are taking less risk akin to debt funds but getting better taxation benefits of equity funds. Effectively, they provide consistent returns like debt funds, and do not fluctuate much like equity funds do when the stock market goes up/down. How do arbitrage funds provide consistent returns and are still equity funds? Let us understand the concept of how arbitrage funds actually work.

The long and short of an Arbitrage Fund

Arbitrage funds generally invest 65% to 90% in derivatives and the remaining 10% to 35% in money market debt instruments or equity, depending on the scheme plan. These funds invest in “arbitrage opportunities” in the market. The opportunities occur where there is a difference in the prices of a share at two different times/locations. It can be a difference in share prices at a point in time in BSE and NSE exchanges, or it can be a difference in the prices of the stock in spot and F&O market. When such an opportunity occurs (and it almost always does), these funds buy and sell the shares at the same time in two different markets. They buy the share from where it is cheaper and at the same time sell it where it is expensive. This way, they earn some money and this money is called the arbitrage money. As they buy and sell at the same time, there is not much risk involved. Even if the stock prices go high or low, it does not make any difference to them because they have already earned their money. This is the reason why these mutual funds are able to offer consistent performance over time.

The rationale

·       Arbitrage fund reduces risk and delivers decent risk-adjusted returns in comparison to other short term debt funds, even in times of market volatility.

·       Taxed as equity funds, they offer a tax advantage over income funds.

On the flip side

·       Though arbitrage fund can be purchased any time, redeeming units happen only on the last Thursday of the month, i.e. on the futures expiry date. For redemptions before that, money will be paid out only on or after that date.

·       Meaningful arbitrage opportunities in the market are not easily available. The fund house will have to be vigilant in identifying such opportunities.

·       A few funds invest in stocks at times when no lucrative arbitrage opportunities are available. In such cases funds are exposed to the same risks as a diversified equity fund.

·       Sometimes, when the futures contract expires, the price of the stock in the cash and futures segments can have a slight difference in their prices. As a result, profit will be affected.

·       Each transaction in the stock market involves payment of brokerage and security transaction tax, STT. These costs affect profits.

Pick the chaff from the grain

Arbitrage funds have been in existence in India for nearly a decade. Erstwhile Benchmark Mutual Fund (now Goldman Sachs Mutual Fund) was the first mutual fund to launch an arbitrage fund. Today, there are 15 funds in India which use arbitrage strategies to generate returns. However, it is important that you carry out basic due diligence before selecting an arbitrage fund. To begin with, you need to differentiate between pure arbitrage and arbitrage plus funds. In the former, the equity component is completely hedged while the latter can take unhedged positions and thus carry a higher risk. Only eight of the 15 arbitrage funds can be considered as pure arbitrage funds. You must also ensure that your arbitrage funds maintain an equity exposure of at least 65% to enjoy the tax benefits of an equity fund. While choosing arbitrage funds, you also need to look at the exit loads which range from 0.25% to 1% for exits varying from 7 days to 1 year.

Make hay …

After remaining relatively stable for several months, the stock market volatility is picking up again. Though the investors are affected by the turbulence, it has turned into an opportunity for arbitragers. Arbitrage trading is a skilled technique and not all retail investors can do it. However, they can resort to it using the arbitrage funds available in the market. As a category, these funds have generated over 9% annualised returns in the recent past, and with the increase in volatility, the returns may be higher in the coming months. Further, interest rates have also been rising, and that is giving rise to more arbitrage opportunities. Mid-caps form a significant chunk of an arbitrage fund’s portfolio these days. For example, nearly 26% of SBI Arbitrage Opportunities’ top equity holding, which forms a little over 50% of the fund’s portfolio, is in mid-cap stocks. Arbitrage funds are good products to invest with a horizon of six months to a year. Avoid looking at its NAV daily. At the same time, do not invest and forget. This is because the arbitrage opportunity can dry up as it did a few years ago. Besides the changes in market volatility, arbitrage opportunity also depends on the number of people chasing it. Indians tend to run after historical returns and the ballooning of arbitrage fund AUMs a few years ago was because of good historical returns generated by these funds. With too many people chasing the small pie, the opportunity reduced and the reverse cycle started. With historical returns coming down, its size also fell. The total AUM is now very low compared to what it was during its heyday in 2007-08. This is good for the current investors. However, keep a close watch and move out if the opportunity is drying up.

… while the sun shines

Arbitrage schemes of mutual funds have fetched better returns than equity and debt schemes in the past one year, thanks to smaller asset sizes and algorithmic trading. These funds have given post-tax returns of 9% over the year, compared with 8.4% for debt funds. Value of equity funds fell 4.1%, according to a CRISIL study. All said and done, arbitrage fund as a category has shrunk in size. Net investment in this category is minuscule. Over the past one year, equity markets have been volatile, thereby creating opportunities for such funds with lower assets under management to generate superior returns. Arbitrage funds have a low risk-return trade-off and generate moderate returns. During the volatile 2006-08 period, arbitrage funds gave healthy post-tax returns of 8-9%. Risk-averse investors, who shy away from equities owing to high volatility, can look at arbitrage funds as a relatively safer option within equities, according to the CRISIL study. According to CRISIL Research, arbitrage funds can act as an alternative to short-term debt funds as they have generated higher returns in the short-term. During the past three and six months, arbitrage funds gave post-tax returns of 2.38% and 4.28%, respectively, vis-a-vis 1.84% and 3.5% for debt short-term funds and 1.99% and 3.74% for ultra short-term funds.

 

No investment is totally risk free. Understand the risks involved before taking the plunge.