Monday, March 26, 2018

March 2018

The mutual fund industry witnessed a fall in average assets in February 2018. The latest AMFI data shows that AAUM of the mutual fund industry was Rs.23.17 lakh crore in February 2018. It decreased by 0.34%, or Rs.23,000 crore, from Rs.23.25 lakh crore in January 2018. AMFI monthly data shows that the month-end AUM was Rs.22.20 lakh crore. While AAUM is the average assets of the entire month that is calculated by factoring in all working days of the period, month-end AUM is the assets of the industry as on the last working day of the month. In February 2018, there was a marginal decline in AUM across all categories except liquid and infrastructure debt funds because of the mark to market losses. The equity markets plummeted after the Budget reintroduced long-term capital gains tax. BSE Sensex lost 1,781 points or 4.95% in February 2018. If we take a one-year view, AAUM was up 25.3% from Rs.18.48 lakh crore in February 2017. In the last 10 years, the AUM has increased four times, from Rs.5.05 lakh crore as on March 2008 to Rs.22.20 lakh crore as on February 2018. The data shows that in a span of less than four years, the AUM has increased more than two times, from Rs.10 lakh crore in May 2014. However, despite the fall in AAUM, inflows into equity mutual funds remained strong. The total net inflow for February 2018 stood at Rs.12,092 crore with the maximum inflow of Rs.14,683 crore witnessed in the pure equity category. “The increase was mainly driven by sustained inflows through SIPs. Compared with January 2018, there was a marginal decline in AUM across all categories except liquid and infrastructure debt funds. Also, the income category witnessed net outflows to the tune of Rs.9,800 crore possibly because of the rise in yields,” according to ICRA. SEBI's latest data shows that mutual fund industry has added 15.7 lakh new folios in February 2018. A rough calculation indicates that the industry has added an average of 52,000 folios per day in February 2018.  This brings the total folio count to nearly 7 crore in February 2018. Within the mutual fund categories, addition of new folios in pure equity, balanced, ELSS, and equity ETF remained robust. The number of new folios remained strong despite the volatility in equity and debt markets following the budget proposal for the reintroduction of LTCG on equity funds.

The asset base of the country's top 10 mutual funds declined by a massive Rs 8,900 crore in February 2018, mainly on account of lower inflows from retail and high networth individuals (HNIs). The AUM of the fund houses slumped to Rs 18,68,404 crore in February 2018, as against Rs 18,77,303 crore in January 2018, as per the data of the Association of Mutual Funds in India (AMFI).  Of the top 10 fund houses, six witnessed a drop in their asset base, while the remaining four -- Kotak Mahindra MF, Axis MF, Reliance MF and ICICI Prudential MF saw rise in their AUMs.  In absolute terms, UTI MF saw the maximum decline in its AUM, which plunged by Rs 4,824 crore from the preceding month to Rs 1.56 lakh crore at the end of February 2018. This was followed by HDFC MF, which saw its asset base slumping by Rs 3,221 crore to Rs 2.99 lakh crore. Next comes, SBI MF, whose AUM dropped by Rs 2,280 crore to Rs 2.16 lakh crore. Birla Sun Life MF, Franklin Templeton MF and DSP Black Rock MF too witnessed a slip in their respective AUMs. On the other hand, the asset base of Kotak Mahindra MF, Axis MF, Reliance MF and ICICI Prudential MF rose in the range of Rs 96 crore to Rs 2,584 crore. Overall, the assets under management of the mutual fund industry, comprising 42 players, declined to Rs 22.2 lakh crore at the end of February 2018 from an all-time high of Rs 22.41 lakh crore at the end of January 2018. Retail investors pulled out over Rs 1.33 lakh crore from the mutual fund industry during the period under review, while HNIs withdrew over Rs 1,100 crore. 

For the first time in FY 2017-18, SIP inflows in mutual funds fell marginally, according to the latest AMFI data. The total SIP accounts stood at 2.05 crore, up from 1.97 crore folios in the preceding month. New SIP registration witnessed a marginal fall in February 2018. More than 10.5 lakh new SIPs were registered while 3.21 lakh SIP folios were discontinued in February 2018. In the preceding month, 12.94 lakh new SIP folios were registered and 3.26 lakh SIP folios were discontinued. The SIP AUM in February 2018 was at Rs.2.05 lakh crore which is 9% of the overall MF AUM. 

Piquant Parade

IDFC is looking to exit the AMC business. IDFC has begun discussions with Indusind Bank and Citic CLSA, among others, to merge or sell its AMC, IDFC Asset Management Company Limited-- that manages about Rs 71,000 crore. A fourth of the AMC’s assets under management (AUM) is equity, while the rest is debt. If the deal goes through, it will improve IDFC's capital position. The deal will fetch IDFC about Rs 4,000 crore, which works out to around 6 percent of the assets under management of IDFC Asset Management. Citic CLSA and private equity firms like Apax Partners have expressed early interest in a deal.  These exploratory talks would gain momentum only after IDFC allows potential bidders to conduct due diligence. In March 2008, IDFC had acquired Standard Chartered’s asset management business in India for a total consideration of USD 205 million (around Rs 826 crore then) in an all-cash deal. The purchase had made IDFC MF the 14th largest AMC among 32 firms in the country then. Since then, IDFC MF has done better for itself and has raised its rank further in the industry even though the number of firms increased and the competition in the industry intensified. According to AMFI, in the December quarter IDFC MF was the 11th largest AMC in the 42-firm strong mutual fund industry. When compared to (Oct-Dec) of 2014, when its assets stood at Rs 48,000 crore, the AUM has grown almost 48 percent. If compared to top 3 players of the industry, in the last 3 years, ICICI Prudential Mutual Fund more than doubled (growth of 114 percent), while HDFC Mutual Fund and Reliance Mutual Fund registered 92 percent and 93 percent growth, respectively.

Paytm Money, the financial services platform of Paytm has received SEBI’s approval to become an RIA. This will allow the company to roll out advisory and wealth management services to consumers across the country. Paytm Money is currently completing integration with the respective compliance and regulatory authorities for KYC under the SEBI regulations. It is also integrating all leading AMCs in India. The company will invest $10 million (approx. Rs.64 crore) in its wealth management business. This will make it among the best funded startups even in the history of Indian financial services distribution business. This intensifies the competition in online financial distribution space. Currently, many online distribution firms sell regular plans to its users.One97 Communications, more popularly known as Paytm is backed by the Chinese e-commerce giant, Alibaba.  It is pertinent to mention here that its promoter Alibaba followed a strategy of deploying the surplus funds of their sellers in liquid funds through their wealth advisory arm Ant Financials (then Alipay), which proved to be a big success. Later, the company expanded their distribution business by offering other mutual fund schemes and financial products.

MF Utility has launched ePayEezz feature that claims to bring down the turnaround time for registration to under 5 days from the current 15 to 30 days. CAN holders can register a one-time bank mandate online without having to submit physical form. This feature uses the eSign facility available for the Aadhaar holders whereby the mandate is electronically signed and transmitted to the destination bank. Currently, 40 banks are enabled for this facility. The current limit for the ePayEezz is Rs.1 lakh as set by NPCI. CAN Holders can register multiple ePayEezz mandates for the same bank account registered with the CAN. The introduction of ePayEezz is likely to draw more interest amongst the CAN Holders as the same removes the hurdle of physical submission of paper based PayEezz registration request and the registration turnaround time is drastically reduced to around 5 days which earlier used to be around 30 days. The distributors and RIAs who have login access to MFU System can initiate ePayEezz registration (DIP – Distributor Initiated ePayEezz) for their customers and CAN holders who have online access can register online by logging into MFU System. The company is planning to extend this service for those who have signed up for the API / White Labelling based integration with MFU.

Regulatory Rigmarole

Markets regulator SEBI is considering reduction in the additional expenses charged by mutual funds by 15 basis points, a move aimed at increasing penetration of such products among investors. As per the proposal, the additional expense of 20 basis points may be reduced to 5 basis points across all mutual fund schemes and this need to be reviewed every two years. A basis point is one-hundredth of a percentage point. In 2012, SEBI had permitted mutual funds to charge 20 basis points of assets under management of the scheme in lieu of exit loads, or the sum mobilised from investors when they offload holdings.  In case of open ended equity and balanced schemes, the additional expenses charged are significantly higher than the actual credit back of exit load to the scheme. In comparison, these additional charges are lower in the case of open-ended debt schemes. Across all open ended equity and balanced schemes, an average exit load of around 5 basis points has been credited back whereas an average additional expense of 18-20 basis points has been charged to such schemes. The regulator is also looking to amend the regulatory framework to enable disclosures related to mutual funds in investor-friendly electronic form. Under this, mutual fund houses need to prominently disclose on a daily basis the total expenses charged to customers for all schemes under a separate head on their websites. Besides, they need to communicate to the investor latest net asset value (NAVs) through SMS following a request from the unit holder. 

Equity mutual funds continued to receive robust fund inflows in February 2018 despite reintroduction of the long-term capital gains tax in the FY18-19 Union Budget and a volatile month, reflecting investors' commitment to long-term investments. Since the Indian equity market has entered a phase of consolidation fearing four rate hikes in the US in 2018, rising crude oil prices, increasing bond yields and uncovered frauds at state-owned banks, investors should focus on the longevity of investments.

Monday, March 19, 2018

March 2018

Though a few ELSS funds launched in December 2017 are still open, a lone Equity NFO from Sundaram Mutual Fund finds a place in the March 2018 NFONEST since the ELSS funds have been discussed in the previous NFONESTS and Reliance Mutual Fund has decided to withdraw the running NFO named Reliance Capital Builder Fund IV Series E.

Sundaram Emerging Small Cap Fund – Series II
Opens: March 19, 2018
Closes: April 2, 2018
Sundaram Mutual Fund has launched Sundaram Small Cap Fund – Series II. The investment objective  of the fund is to seek capital appreciation by investing predominantly (at least 65%) in equity/equity-related instruments of companies that can be termed as Small Caps. Small Cap Stocks are defined as 251st company onwards in terms of full market capitalization. Various studies have shown that small caps can deliver higher returns than large caps over the long term. However, the risk associated with them is also correspondingly higher. There is also a lack of liquidity in these companies and this is where a closed-ended structure helps. A fund manager does not have to worry about a spurt of sudden outflows. The fund is benchmarked against the S&P BSE 250 Small Cap Index. The Fund Managers are Mr. S. Krishna Kumar and Dwijendra Srivastava.

IDFC Equity Opportunities Fund – Series 6 and 7, India Bulls Prudence Fund, Axis Ultra Short Term Fund, Shriram Multicap Fund, Mirae Asset Healthcare Fund,  Canara Robeco Capital Protection Oriented Fund – Series 10, Canara Robeco Dual Advantage Fund – Series 10, SBI Debt Fund Series C - 15 to 20,  DHFL Pramerica Money Market Fund, Reliance India Opportunities Fund – Series A to E, UTI Equity Savings Fund, Tata Multicap Fund, Tata Credit Risk Fund, Kotak Capital Protection Oriented Fund – Series 5 and 6, DHFL Pramerica Focused Equity Fund and IDFC Dual Advantage Fund Series 3 and 4  are expected to be launched in the coming months.

Monday, March 12, 2018

March 2018

All the GEMs from the 2017 GEMGAZE have performed reasonably well through thick and thin and figure prominently in the 2018 GEMGAZE too. 

Kotak Equity Arbitrage Fund Gem

Incorporated in September 2005, Kotak Equity Arbitrage Fund has an AUM of Rs 14,592 crore, a nearly three-fold increase over the AUM of Rs 5,629 crore in 2017. The fund is a blend of value and growth style of investing with an objective to generate income through arbitrage opportunities emerging out of pricing anomaly between the spot and futures market, and also through the deployment of surplus cash in fixed income instruments. 60% of the fund’s corpus is deployed in arbitrage trades and the rest is invested in FD, debt funds and securities. The fund has given annualized return of 7.66% since inception. The one-year return of the fund is 6.27% (6.77% for the direct plan) modestly trailing the category average of 6.28%. The top three sectors are finance, healthcare and communication. Top five holdings constitute 37.05% of the portfolio. The portfolio turnover ratio is 354% and the expense ratio is 0.89% (0.43% for the direct plan). The fund is benchmarked against the Nifty Fifty Arbitrage Index with Mr. Deepak Gupta efficiently managing the fund since September 2008.

JM Arbitrage Advantage Fund Gem

The Rs 3,763 crore JM Arbitrage Advantage Fund, incorporated in July 2006, has earned a one-year return of 5.25% (5.63% for the direct plan) trailing the category average return of 6.28%. Top five holdings constitute 29.87% of the portfolio with finance, FMCG and energy forming the top three sectors. Instruments in arbitrage trades constitute 65.21% of the portfolio with 35.02% in debt. 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 November 2006, has an AUM of Rs 1,239 crore. Its one-year return is 6.05% (6.6% for direct plan), as against the category average return of 6.28%. The top five holdings constitute 20.95% of the portfolio. Finance, communications and services are the top three sectors. 62.87% of the portfolio is made up of instruments in arbitrage trade with 37.31% in debt. The portfolio turnover ratio of the fund is a massive 1157%. The expense ratio is comparatively low at 0.8% (0.25% for direct plan). 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 a nine-year old fund with an AUM of Rs 3,011 crore. The objective of the fund is to generate capital appreciation and income by predominantly investing in arbitrage opportunities in the cash and the derivative segments of the equity markets and the arbitrage opportunities available within the derivative segment and by investing the balance in debt and money market instruments The fund’s total exposure to arbitrage position is 62.29% of the portfolio and 37.83% is in debt and money market securities. The fund was launched in December 2006, and has given 7.33% since its launch. Its one-year return of 6% (6.66% for direct plan) is a tad lower than its category average of 6.28% 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 26.54% of the portfolio, with communication, finance and healthcare being the top three sectors. While the portfolio turnover ratio is high at 392%, the expense ratio is very low at 0.97% (0.27% for direct plan), an icing on the cake, indeed. The fund has been managed by Yogik Pitti since June 2013, Harshal Joshi since October 2016, and Arpit Kapoor since March 2017.

ICICI Prudential Equity Arbitrage Fund Gem

Incorporated in December 2006, ICICI Prudential Equity Arbitrage Fund has an AUM of Rs 11,845 crore. The fund’s objective is to generate low volatility returns by using arbitrage and other derivative strategies in equity markets and investments in a short-term debt portfolio. The fund manager employs Cash arbitrage strategy in which it pockets the difference in price of stocks between the cash market and futures market. In Index arbitrage strategy it takes equal and opposite positions in index futures and corresponding stock futures constituting the index in proportion to their respective weights in the index simultaneously, to lock in the price difference. The fund has performed consistently over a long period of time and has given annualized return of 7.85% since inception. The one-year return of the fund is 5.93% (6.6% for direct plans) slightly trailing the category average of 6.28%. The top three sectors are finance, healthcare and FMCG. Top five holdings constitute 13.26% of the portfolio, with the equity exposure at 2.74% and debt constituting 32.75% of the portfolio with the rest in cash and cash equivalents. The portfolio turnover ratio is a towering 1083% and the expense ratio is 1.06% (0.46% for direct plan). The fund is benchmarked against the Nifty Fifty Arbitrage Fund Index with Mr. Manish Banthia and Mr. Kayzad Eghlim efficiently managing the fund since November 2009 and February 2011 respectively.

Monday, March 05, 2018

March 2018
Steady Returns at Zero Risk of Capital Losses

Can you name an investment that offers steady returns and offers zero risk of capital losses? Arbitrage Funds is the answer. Arbitrage funds are a type of equity-oriented hybrid mutual funds that generate returns through the simultaneous purchase and sale of securities on different exchanges that feature a pricing mismatch. This is a diametrically different approach from that of the typical equity fund, where the fund invests in equities and holds those till they can be sold at a profit in the future. In case of an arbitrage fund, the fund would typically buy a security from the cash market (stock market) and simultaneously sell the same security on the futures contracts market at a different price in order to generate a profit in the overall transaction. In a majority of cases, the difference between futures contracts and stock prices is small, hence on an average, arbitrage funds have to make hundreds of trades in a day in order to turn a profit. A secondary route of investment for arbitrage funds are short term debt and money market instruments. However, these form a relatively smaller portion of the arbitrage fund’s overall portfolio.

Arbitrage Fund – a unique class

The following are some of the key features that make arbitrage funds a unique class of mutual funds in the hybrid funds category.

Equity-Based Investments: Arbitrage funds are mainly invested in equities as well as futures i.e. equity derivatives. On an average, these comprise at least 65% of the mutual fund’s portfolio. Thus for purposes of taxation and classification, arbitrage funds are considered to be equity-oriented hybrid funds. Apart from the equity portion of the portfolio, arbitrage funds also invest in a range of debt and money-market instruments including cash. The portion of these secondary investments tends to be higher when arbitrage opportunities are limited during periods of relative market stability.
Perform Best in Volatile Markets: An arbitrage fund performs best when there is an opportunity available to the fund as a result of the price differences in the spot and derivatives markets. When markets are expected to be stable in the long term, this difference in pricing is minimal hence traditional arbitrage transactions might not generate a profit after securities transaction charges/brokerage is factored in. On the other hand during periods of volatility, there is often a marked difference between the spot and futures prices, which provides arbitrage funds with an opportunity to score big. This is the main reason why the portfolio of an arbitrage fund tends to feature a greater value of equity investments during periods of high market volatility, while debt investments tend to increase during periods of relative market stability.
Equity investments limited by availability of futures contracts: Arbitrage funds in India have limited scope of making equity investments because they can only buy shares traded on the exchange that have futures contract options available. The Indian derivatives market is relatively less developed than many other advanced markets which somewhat limits the scope of arbitrage-style investments. This limitation arises from the fact that arbitrage funds cannot make an equity investment without having the option of hedging it with a futures contract (i.e. no naked positions/options are allowed). As a result of this limitation, there are fewer arbitrage funds currently available in India as compared to many other advanced financial markets such as the US.
Dividend Earnings and LTCG  taxed: Dividends in case of mutual funds are not taxable when in the hands of the investor. This holds true for all equity, debt and hybrid funds that are available for investment in India. However, dividends obtained from non-equity mutual funds are subject to a dividend distribution tax (DDT) of around 30% (28.84%) , which is payable to the government directly by the fund house. This tax expense is eventually passed on to the investor as part of the fund’s expense ratio. In case of an equity-oriented scheme such as an arbitrage fund, the dividends paid out to the investor is taxed at 10% DDT. From 1st April 2018, a Long-term capital gain of equity mutual funds exceeding Rs. 1 Lakh will now attract a tax of 10%. This taxation will be without the indexation benefit. Under this new rule, LTCG from even equity oriented hybrid funds like Balanced funds and Arbitrage funds will also be taxable. The short-term capital gain arising from the sale of units within 12 months of investment will continue to be at a flat rate of 15%. If the investor continues to stay invested and sells equity funds later on then his/her long-term gains up to 31st Jan 2018 would be exempt.
High Turnover/Expense Ratios: In case of an arbitrage fund, the key method of investing is to make repeated purchases and sales of the same securities simultaneously on the stock market and the derivatives markets. This process of buying and selling gets reflected in the turnover ratio of the arbitrage fund as no stock or futures contract can be held for a long period of time. Hence, an arbitrage fund will tend to have a higher turnover ratio (often around 800% or even more) as compared to most other types of mutual funds. Transactions made on the securities or derivatives markets are subject to various brokerage fees as well as applicable taxes. These transaction charges are expenses that the mutual fund includes in its expense ratio and passes on to the investor. As mentioned earlier, an arbitrage fund tends to perform numerous buy/sell transactions in a day in order to generate adequate returns. Hence it will tend to feature a higher expense ratio as compared to many other types of mutual funds.
Low Risk Investments: An arbitrage fund hedges its bets through simultaneous transactions on different markets. As a result of this hedging, an arbitrage fund can potentially make a profit no matter which direction the market moves. This is a unique feature in case of a mutual fund and therefore an arbitrage fund is considered to be a low risk investment, which is considered suitable for risk-averse investors seeking low risk equity-oriented investment options.

Bears, Bulls and Arbitrage Funds

The general investor perception about Arbitrage Funds being all weather birds needs a relook. These funds leverage on the mispricing of securities. During the bull-run, the probability of mispricing increases on account of high volatility. Moreover, the futures tend to be priced higher than the cash segment, i.e., equities. Consequently, investments in stocks in portfolio stand to gain. The fund managers sell the futures and buy the stock in the cash market, thus booking risk-free return. During bear runs, futures tend to be priced at a discount, i.e. below the stock price. The arbitrage opportunity hence disappears.

Returns can swing
Cash futures arbitrage helps funds earn their returns in regular monthly doses, thus making them a good option for regular income seeking investors. On this count, arbitrage funds are less risky than debt funds because they do not take on interest rate or credit risks which can cause NAV blips. But this is not to say that Arbitrage fund returns are fixed. They can vary from month-to-month and year-to-year. In June 2015, Arbitrage Funds sported one-year returns ranging from 7.1 to 8.7%, with a three-year CAGR of 8.5%. But in June 2017, returns are much lower, ranging from 5.5 to 7.3%, with a three-year CAGR of 7.2%. The returns from Arbitrage Funds, as a class, are influenced by three factors. One, the spread which can be made on cash-futures arbitrage can rise or fall with short-term interest rates in the market. Two, the spreads are also dependent on the participants in the arbitrage market. Three, if markets are volatile or bullish, traders are willing to pay higher interest costs, to buy futures widening the spread. In bear markets, interest in derivatives can wane, thinning out arbitrage opportunities and returns. Investors entering Arbitrage Funds now, can keep their return expectations moderate at the 6 to 7 % range.
How have Arbitrage Funds Performed?

Arbitrage funds look to exploit the price differences in stocks between the cash and future market. They are recommended to conservative investors looking to park money in the short to medium term.  The Arbitrage fund category average return in the last one year was around 5.5% and in the last 2 to 3 years the returns have been around 7%. The returns from Arbitrage funds have slightly decreased over the last couple of years. The returns on these funds are mainly dependent on the fund manager’s ability to spot arbitrage opportunities. As more funds and more monies chase the arbitrage opportunities, the returns can reduce. If you observe, the AUM of all the funds have increased tremendously in the last couple of years. ICICI Prudential Equity Arbitrage Fund’s AUM has increased from Rs 1,000 crore in 2016 to around Rs 11,000 crore in 2017. If you decide to invest in an Arbitrage Fund, consider opting for a Direct plan. The returns generated by the Direct Plan is 6.27%, 6.8% and 7.24% over one, two and three years respectively, better than the Regular Plan returns of 5.59%, 6.1% and 6.62% over the same time period. The Expense ratio of the Direct plan is 0.27% and for the Regular Plan it is 0.87%.

Arbitrage Funds – losing out on their edge over Debt Funds?

Arbitrage Funds started gaining traction in India since 2014 when liquid fund gains started getting taxed. Taxation and risk are the main factors which concern the investors most. Before 2014, short-term debt funds were considered as best option for risk-free returns from investment in mutual fund. After government reduced the tax benefits for debt funds, Arbitrage funds became popular. Arbitrage Funds became the “apple of investor’s eyes”, who sought risk-free and tax-free return on their investment. Its investment strategy to generate a return with less risk and taxation benefits have attracted a large number of investors. Arbitrage Fund returns have fallen in the past three years. From delivering 9-9.5% per annum not too long ago, they (as a category) delivered just 6.43% in the previous twelve months. Short Term Debt Fund returns, on the other hand, are on the rise - with a category average of 9.43% in the past year, which is very impressive for a low-risk instrument. Now with the new taxation policy in Budget 2018, Arbitrage funds are fast losing their tax advantage and are facing the peril of fading away from the portfolio of investors.

Be cautious of Arbitrage Funds with unhedged equity allocation

As arbitrage schemes began gaining traction, fund houses were soon to capitalise on the trend and launched a modified form of arbitrage funds. These funds, also known as Equity Savings Funds or in some cases Enhanced Arbitrage Funds, included an unhedged equity exposure. Equity Savings Funds are comparable to Monthly Income Plans that have a small equity component of 10%-20%. However, as Equity Savings Funds invest in equity Arbitrage opportunities instead of debt, they are treated as equity schemes and enjoyed tax advantage. However, due to the unhedged equity exposure, the risk involved is higher than pure arbitrage schemes. Hence, returns will be volatile. Risk averse or conservative investors seeking steady returns should ideally stay away from such schemes.

Points to ponder

  •          Arbitrage Fund’s return is based on the volatility of the market. It doesn’t take any directional call in any stocks or in future market.
  •          Arbitrage Mutual Funds offer investors high liquidity and better returns than savings bank account. Most of the Arbitrage Mutual Funds do not charge exit loads for redemptions after 7 - 30 days of investment.
  •          Arbitrage Mutual funds can give good short term returns in volatile markets which is comparable or even higher than liquid funds and ultra-short term mutual funds
  •          Investors should be prepared for very short term volatility before expiry of futures contract (last Thursday of every month). Sometimes the fund manager may find better divergence between spot and futures price in later monthly series relative to current month series of F&O contracts; which implies that the investor may have to wait a little (two or three months) longer.
  •         You can invest lump sum amounts in these funds for short-term goals. Systematic Investment Plan (SIPs) in these funds may not really make sense.
  •          The fund is not a substitute of the debt fund, both have different investment objective with different risk factors.
  •          You can consider these funds as one of the saving options when you are building your emergency fund.
  •          Arbitrage opportunity is not present in the market at all times.

From the above analysis, we can say that arbitrage schemes are an apt choice if your holding period is less than three years. Arbitrage funds are for conservative investors with investment horizon of 1 to 3 years. For investors having a horizon of less than 6 months, ultra short-term debt funds will be the best bet as compared to Arbitrage Funds. The difference in taxation makes a significant transformation in the net returns. Like with all investment avenues, you need to choose wisely. Prudent investing and financial discipline are vital ingredients for long-term financial well-being.