FUND FULCRUM (contd.)
(March 2010)

Piquant Parade

Today, 38 asset management companies operate in India. Peerless and Axis Bank were the most recent entrants in the business. Meanwhile, Bank of India, SREI Infrastructure Finance, Bajaj Allianz, and Indiabulls await SEBI approval to get started.

IDBI Asset Management, a subsidiary of IDBI Bank, has received approval from Securities and Exchange Board of India to commence its mutual fund operations. The launch of the asset management business is in line with its long term vision to emerge as a leading Universal Bank which will provide the entire gamut of financial services to its customers. This is a second beginning for IDBI Bank in the mutual fund business. IDBI was among the first few entities to launch its mutual fund business in 1994. IDBI first roped in a partner, the Principal Financial Group and eventually sold its interest (50%) in 2002 to exit the AMC. IDBI bank had exited the venture to concentrate on setting up its retail business. Now with an established retail presence, the fund felt that it is the right time to enter the mutual fund space.

Union Bank of India and Belgium-based KBC Asset Management will jointly invest € 50 million (approx Rs 300 crore) in a new asset management company, Union KBC Asset Management. Union Bank holds 51 per cent stake and KBC 49 per cent in the JV, which was inked in November 2008. The bank has received approval in principle for the asset management company. The bank expects to get the final approval in two to three months' time and to launch its first fund in the last quarter of this calendar year.

SBI Mutual Fund became the first fund house to introduce a new payment option (for investment) effective March 22, 2010, offering online investment in SBI Mutual Fund schemes through State Bank of India’s ATM cum Debit cards. This would technically enable all SBI ATM cum debit card holders to invest in SBI Mutual Fund’s schemes even if they do not have SBI Internet banking facility, thereby, adding to a whole new universe of potential investors for SBI Mutual Fund. This facility is available for all SBI Mutual Fund’s Equity and most of the Debt schemes. Investors can invest amounts, subject to a maximum limit, as periodically decided by SBI.

ICRA Online (ICRON), a subsidiary of rating firm ICRA, and Belgium-based Society for Worldwide Interbank Financial Telecommunication (SWIFT), entered into an agreement for setting up a payment gateway for transactions in mutual funds. When an investor logs onto a mutual fund trading platform, provided by various fund houses, he will be asked to either register for net banking or the ICRON-SWIFT gateway. The ICRON-SWIFT gateway will help reduce the time span for mutual fund transactions to one day as against the existing three days. This would be operational by early 2011. The platform would enable both institutions and retail investors to make payments against purchase of mutual fund units without writing cheques. The platform will effectively make use of secured mobile messaging system or the email messaging facility for fund transfer advices.

Regulatory Rigmarole

SEBI proposes to bring about far-reaching changes in the rules governing the operation of mutual funds through its circular dated March 15, 2010.

Unlike stock IPOs, mutual fund offers stay open for a long period, sometimes 30 or even 45 days. SEBI has now asked that this be shortened to 15 days (ELSS funds have been exempted). Mutual funds/asset management companies shall use the NFO proceeds only on or after the closure of the NFO period. The mutual fund shall allot units/refund money and dispatch statements of accounts within five business days from the closure of the NFO. The reasoning behind the shortening of the NFO period is that over a long period during which the issue is open, investors who apply early in the period find their money locked in unproductively. In the same spirit, SEBI has extended the ASBA (Applications Supported by Blocked Amount) system to mutual fund NFOs. In ASBA, investors apply for IPOs while the application amount stays in their own account and is just blocked from other use. The issuer is able to withdraw the amount when it allots the shares. Both these changes will be effective from July 1, 2010.

SEBI does not want mutual funds to pay dividends out of the funds deposited by investors, but only out of the returns earned by the funds. SEBI has directed mutual funds to pay dividends only from realised gains. This is how it works: For instance, if the face value of an equity diversified fund is Rs 10 per unit and its net asset value (NAV) rises to Rs 100, then Rs 90 will be part of the unit premium account (similar to accumulated reserves of companies). So, if an investor bought units at Rs 100 a unit, the dividends paid by the mutual fund would be drawn from the unit premium account, a practice which amounted to paying unit-holders their own money. As per the new rules, SEBI is asking mutual funds to pay dividends from profits booked in the event of a surge in the market. This means, if the NAV rises from Rs 100 to Rs 110, mutual funds can only use Rs 10 to distribute dividends, provided profits were booked. This step will certainly affect the quantum of dividend payouts by mutual funds, and more importantly, it will curb improper conduct of distributors while selling.

The market watchdog has said that fund houses cannot enter into revenue-sharing arrangements with underlying funds in the case of fund of funds (that is, funds in whose schemes the investment is being made). Till now, there was no mandate as to where the FoF would use the revenue earned. Hence, it was being used for marketing and paying commissions to agents. Now, it will be passed on to the scheme and, hence, to investors.

The market regulator has emphasised the need for mutual funds to play a bigger role in corporate governance matters of listed companies. AMCs shall disclose their general policies and procedures for exercising the voting rights in respect of shares held by them on the website of the respective AMC as well as in the annual report distributed to unit-holders from the financial year 2010-11.

SEBI has issued a directive regarding the fee charged by no-load funds. Earlier, when there were schemes that charged an entry load and others that were no-load, the no-load schemes were allowed to charge an additional management fee of 25 basis points. Since SEBI’s August 2009 directive, all funds have become no-load funds. SEBI has now asked no-load funds to stop charging the additional 25 basis points as fee.

Any brokerage or commission paid to the fund’s sponsor, its associates, or related people must be disclosed in the fund house’s half-yearly report.

Securities and Exchange Board of India has implicitly stated in the February 2010 circular that all mutual fund investors, irrespective of the amount invested, should comply with know-your-customer (KYC) norms w.e.f. April 1, 2010. SEBI had said on December 11, 2009 that all documents related to an investor, including KYC and power of attorney details in respect of transactions/requests made through Mutual Fund distributors, should be available with RTAs and AMCs. It had asked fund houses to confirm if they were maintaining all investor-related documents. No further payment of commissions, fees and/or payments in any other mode were made to such distributors till full compliance/completion of the steps. As a result, fund houses have not been paying commissions to distributors for two months. With commissions already shrinking after the entry loan ban, this has made things worse for distributors. SEBI’s fiat has hit foreign banks — among the large mutual fund distributors — harder than the rest. AMFI has formed a working group which has proposed KYC compliance in two phases for all current folios, with the first phase being done by the next fiscal.

As far as the capital market is concerned, the changes in tax laws which are likely to happen through the direct tax code (DTC), will be done from April 1, 2011. The direct tax proposals as they stand today seek to tax capital gain at full rate as compared to the zero tax right now. If you are a new buyer and you are buying into stocks at the current levels then your incremental tax liability will be a little less. But if you are holding investments in equities for years together at a very low acquisition cost, you have accumulated a lot of long-term capital gains which is right now not subject to any tax. The other change that the DTC seeks to do is on the change to Exempt – Exempt – Taxable (EET) from Exempt – Exempt – Exempt (EEE). If investing in bank deposits and in a capital market product attracts the same tax rates, people will be simply happy putting all their money in banks. So it has a serious implication on domestic investor’s ability to buy the market. The DTC holds the key.

The mutual fund investment landscape in the country has undergone radical changes with more changes underway…

FUND FULCRUM
(March 2010)

It has been a roller coaster ride for mutual fund investors in the past one year. Investors who have parked their money in diversified equity funds have earned an excess of 100% on an average. The Sensex soaring by almost 96% was a part of the story… fund managers outperforming key indices by a mile was the other part of the story. The mutual fund industry’s average assets under management increased by Rs 20,085 crore or 2.64 per cent to Rs 7,81,712 crore at the end of February 2010 from Rs 7,61,625 crore in January 2010 as per the data released by the Association of Mutual Funds in India. The increase in assets can be attributed to increase in investor’s comfort level, corporate inflows into liquid schemes, and bank money which has begun to flow in once again. Within the banking spectrum, it is the private and the foreign banks that have been the major investors. Though high net worth individuals invested in a falling market, equity inflows have not been substantial. Moreover, despite this being a tax-saving season, equity-linked savings schemes were witnessing moderate inflows.

India’s largest fund house, Reliance Mutual Fund, retained the top slot with an AUM of Rs 1,15,753 crore during February 2010 inspite of an outflow of Rs 1.495 crore from its assets, a fall of 1.28%. The worst-performers in February were AIG Global Investment Group Mutual Fund and Bharti AXA as their assets fell by 12.67 per cent and 12.01 per cent respectively. Escorts, Morgan Stanley, ING, and Mirae too fell by over 5 per cent. But the number of funds that were axed fell from a high of 22 in January 2010 to 14 in February 2010. The country’s second largest fund house, HDFC Mutual Fund’s AUM, which had crossed Rs 1,00,000 crore in November 2009, recorded a rise of 0.37% and stood at Rs 95,144 crore. ICICI Prudential Mutual Fund’s AUM grew by Rs 2,155 crore during February 2010 and stood at Rs 80,527 crore. UTI Mutual Fund and Birla Sun Life Mutual Fund saw their assets rising to Rs 79,310 crore and Rs 66,306 crore respectively. However, the best-performer was Axis Asset Management Company, which saw its assets grow by 42.13 per cent to Rs 3,753.8 crore. Assets of smaller fund houses like Taurus Mutual had grown by 27.05%, Shinsei Mutual Fund (14.67%), Fortis Mutual Fund (14.43%), Benchmark Mutual Fund (11.51%), and Baroda Pioneer Mutual Fund (10.52%). The highest inflows were seen by UTI Mutual Fund, followed by Birla Sun Life Mutual Fund, Kotak Mutual Fund, and ICICI Prudential Mutual Fund. Highest outflows were witnessed by Reliance Mutual Fund, with LIC Mutual Fund, SBI Mutual Fund, and HSBC Mutual Fund following suit.

While sales from existing equity schemes dropped 36.1% to Rs 5,006 crore, redemptions, which hit a two-year high in January 2010, plummeted 49% to Rs 3,492 crore in February 2010 according to data with the Association of Mutual Funds in India. Redemptions from equity schemes for February 2010 are the lowest since April 2009. After registering net outflows for five consecutive months, equity funds saw a turnaround in January 2010 on the back of a strong growth in sales from existing equity schemes. The mutual fund industry has consolidated the gains in February with net inflows for the month coming at Rs 1,514 crore, according to AMFI. Redemption pressure has come down significantly. Many investors who came at higher levels have made an exit. People were in a wait and watch mode till the budget. Since the budget has largely been investor friendly huge redemptions have not taken place.

Piquant Parade

Mr. H.N. Sinor will succeed Mr. A.P.Kurien, as the Chief Executive Officer of AMFI in September 2010. The term for Mr. H N Sinor will be a period of three years and he has vast experience in the financial sector and mutual funds. Out of his total experience of 42 years in the banking sector he had his last assignment with the Indian Bank’s Association as its Chief Executive for the last five years.

Bank of India has tied up with Reliance Mutual Fund to distribute mutual fund products of Reliance Mutual Fund through its branches across the country. Reliance Mutual Fund will be benefited by over 3,000 branch network of the bank.

Reliance Mutual Fund has decided to introduce the facility of online transaction for its investors. The facility is available under the schemes Reliance Infrastructure Fund, Reliance Natural Resources Fund, Reliance Long Term Equity Fund, and Reliance Money Manager Fund. The facility has been effective from February 22, 2010. The investors can use this facility to apply for subscriptions, redemptions, switches, and other facilities with effect from the transaction date. The uniform cut-off time for online transactions remains the same as prescribed by SEBI and mentioned in the Scheme Information Documents of the respective schemes.

In the next few months, fund houses such as Deutsche Asset Management, Taurus Mutual, Tata Mutual, and Reliance Mutual, will launch schemes with rural economy and agriculture as broader investment themes. Fund managers, who are planning to launch agriculture and rural funds, are expecting the farm sector to do well against the backdrop of a looming food crisis. According to World Bank estimates, almost 23 crore children and adults wake up each morning unsure of where their next meal will come from. Global food shortages have resulted in rising prices of cereals and food prices by nearly 20 per cent and 50 per cent respectively in the past five years. The rural economy will benefit from the huge outlay for social infrastructure development. Under the Bharat Nirman Plan, micro-sectors such as irrigation, roads, water supply, housing, and rural electrification will get support from the government. These micro-sectors would entail huge investments. Development in the rural economy will increase the income of rural households. Rural spending on personal care, consumer goods, health care, education, and other services will grow even better from current levels.

Compared to other regions of the country, Mutual Funds have still not gained popularity as an investment vehicle in Assam and North-East, found a recent survey done by Bajaj Capital, one of the leading investment advisory and financial planning companies in India. According to the survey, a retail investor in Guwahati invests about 15 per cent of his income into investment products, the most preferred being life insurance which accounts for about 50 per cent of the investible surplus. The survey also revealed that only about 15 to 20 per cent of the investors consult professional investment advisors or financial planners to plan their investments. Majority of people continue to consult friends or relatives and end up allocating most of their surplus in one asset class rather than a healthy allocation across various asset classes. The survey also found that investment instruments like high quality company fixed deposits or even safer instruments such as government bonds are preferred by investors of the region. A region with enormous potential waiting to be tapped by the mutual fund industry…

to be continued…

NFO NEST
March 2010

Jumbo NFOs go the dino(saur) way…

Are the days of mega NFOs from mutual fund houses over? A comatose distribution network, rendered ineffective after SEBI abolished entry load on fresh investments in mutual funds in August 2009, has played a paramount part in pushing prodigious NFOs into oblivion. Though it is a bit premature to write the obituary of new offerings from funds, the days of gargantuan NFOs are a thing of the past.

IDFC Capital Protection Oriented Fund - Series I – Growth

Opens: February 24, 2010
Closes: March 24, 2010

The twelfth capital protection-oriented fund in the Indian mutual fund industry, IDFC Capital Protection Oriented Fund Series-1 is a three-year closed-end fund. The fund initially intends to deploy at least 84 per cent of the funds collected during the NFO period in debt securities and money market instruments with a view to protecting the principal capital at the time of maturity of the plan. The fund allows investment of up to 16% in equity and equity related instruments. The strategy ensures that you get your capital back irrespective of the performance of equity. This way the fund aims to offer you an opportunity to invest in equities without risking your entire investment. The fund has been benchmarked against CRISIL MIP Blended Index. The fund would be managed by Ashwin Patni who jointly manages IDFC Arbitrage fund and IDFC Arbitrage Plus Fund.

On the taxation aspect, the fund is a sure shot winner. The fund scores over a fixed deposit as the returns earned are taxed at lower of 10.3% without indexation, or 20.6% with indexation like a debt mutual fund, whereas the fixed deposit returns are taxed at 30.9%. Moreover, there is no TDS for resident Indians, unlike other traditional deposits. The only difference between a fixed deposit and such a fund is that returns on fixed deposit are known to investors at the time of investing. As far as returns are concerned, while the fixed income securities can give you an average return of about 7-7.5 per cent, the possible return on equity portion for a 3-year period is left to chance. In the past three years, narrow or broader indices (such as BSE 500, Sensex or Nifty) have given 11-13 per cent annualised returns. There could be wide variance in terms of returns. For the past 12 months, capital protection oriented schemes have returned a maximum 23 per cent and a minimum 7 per cent. So fund selection is absolutely essential. The typical fee structure of capital protection-oriented funds is high at 2.25 per cent of assets under management. However, these funds have no entry or exit loads.

The aim of this fund is to provide an attractive investment solution to the conservative investors in India who have over 46 lakh crores invested in Fixed Deposits. This fund offers investors twin benefits of making their money grow in line with inflation while ensuring that their capital remains protected. Clearly, the target is traditional fixed income investors with safety on their mind and with a time horizon of two to three years.

IDFC Hybrid Portfolio Fund - Series I

Opens: March 1, 2010
Closes: March 24, 2010

IDFC Mutual Fund has launched IDFC Hybrid Portfolio Fund - Series I, a closed-end debt scheme. The scheme shall mature on September 28, 2011. The scheme endeavors to generate income by investing in high quality fixed income securities as the primary objective and generate capital appreciation by investing in equity and equity related instruments as a secondary objective. The scheme would allocate 50% to 93% of assets in debt instruments and money market instruments with high risk profile. It would further allocate 7% to 50% of assets in equity and equity related instruments with medium risk profile. Investment in securitized debt and foreign securities would be up to 50% of net assets of the scheme. Investments in derivatives would be up to 100% of the net assets of the scheme. The Scheme's performance will be benchmarked against CRISIL MIP Blended Index. Ashwin Patni will be the fund manager for the scheme.

MOSt Shares M50 - Motilal Oswal ETF, DWS Gold Advantage Fund, Tata PSU Equity Fund, Axis Triple Advantage Fund, HSBC Brazil Equity Fund, Quantum Gold Fund - Exchange Traded Fund, Quantum Gold Savings Fund, DWS Gold Advantage Fund , Taurus Sector Rotation Fund, and Taurus Rural India Opportunities Fund are expected to be launched in the coming months.

GEM GAZE
March 2010

Advantage Arbitrage

The derivatives markets account for around Rs 60,000 crore and arbitrage mutual funds manage around Rs 3,000 crore. This leaves enough space for mutual funds to reap the benefits of the available arbitrage opportunities. Arbitrage Funds make the most of the difference across markets by investing in cash and futures market in a diversified basket of equity & equity related instruments, derivative and debt and money market instruments in accordance with asset allocation pattern. Arbitrage funds can be liquidated any time or once a month in some cases. Moreover, the dividends are totally tax free and both the principal and dividend are fully and freely repatriable too.

Arbitrage Funds that have stood the test of time and retained the glittering glory and the much sought after status of a GEM in 2010 have been exhibited below.

UTI Spread Fund Gem
Energy sans expense

One of the best performing arbitrage funds, this Rs 500 crore fund was a category topper in 2008 with a return of 10.60 per cent. Right from January 2008 till March 2009, the fund had outperformed the category average. That is definitely a reward for its bold stance that often goes against the general market trend. The one-year return of the fund in 2009 is 5.5%, way ahead of the category average return of 3.82%. An expense ratio of a mere 1% is a jewel in the fund’s crown. The top three sectors account for 37%, with construction and energy occupying the top two slots. Investment in equity is at 73% with debt constituting a mere 16%.

HDFC Arbitrage Fund Gem
Formidable fortress

Fortitude in a falling market has been the fund’s forte. If we look at the period from January 2008 to March 2009, the market had been in the red for 10 months. Overall, during 11 of these 13 months, the fund had outperformed the category average. On the other hand, in the year 2009 when the market closed in the green, the fund has been able to beat the category average. HDFC Arbitrage Fund has returned approximately 3.91% in the last one year as against the category average of 3.82%. The expense ratio is a paltry 0.82%. This Rs 245 crore (Rs 742 crore in the case of wholesale fund) fund has a penchant for the financial sector with energy being accorded the next preference. The top three sectors account for 32% of the total assets. 63% of the assets are invested in equity instruments while 29% of the assets are invested in debt instruments.

Kotak Equity Arbitrage Fund Gem
Consistent and flexible

Two factors stand out in favour of this Rs 727 crore fund. It has been a consistent player in this category and its expenses have always been on the lower side. Its one-year return of 4.48% in 2009 is well above the category average. Its expense ratio is 1.05%. This fund is very flexible in its approach. It has no market capitalization bias while looking for arbitrage opportunities. It started as large-cap fund but now has around 83 per cent in mid- and small-caps. In adverse market conditions, the fund has the leeway to go 100 per cent in debt. Though it not done so, since launch it has, on an average, maintained a 41.70 per cent exposure to debt. The exposure to debt at present is 33%. Currently, equity exposure is nil.

JM Arbitrage Advantage Fund Gem
Solid but expensive

The fund, sporting an AUM of Rs 497 crore, has been a solid performer delivering above average returns. The one-year returns have been 4.1% as against the category average of 3.82%. This fund is betting big on the technology and financial sectors and has allocated around 34 per cent of its holdings to the top three sectors. The fund has allocated 68% of the funds to equity and 23% to debt. A major concern is that its expenses are growing, an indication that the fund probably trades very heavily. While trading generates returns, the downside is that growing expenses eat into returns.

SBI Arbitrage Fund
Mediocre mountain

Though it boasts of an asset base of Rs 470 crore, its performance is just about average. One-year return is 3.83% as against the category average of 3.82%. The fund manager moves in and out of sectors frequently and does not hesitate in taking concentrated sector bets. Financial services, for instance, had an allocation of 31.50 per cent in August 2007 which dropped to 19.88 per cent the very next month. Between January and February 2008, the allocation rose from 7 per cent to 20.42 per cent. It was the same in energy where the allocation moved up from 12.64 per cent (November 2007) to 24.44 per cent (December 2007) and down to 17.25 (January 2008) and back to 12.74 per cent (February 2008). At present, energy and construction are the top two sectors with the top three sectors occupying 37% of the total assets. Although the fund's mandate limits its debt investment to 35 per cent, in the months of September and October 2008 the average allocation to debt stood at 63.39 per cent. Right now, the percentage allocated to debt is 29% with 67% being invested in equity.

Going that extra (1% return) mile!

Arbitrage Funds give an extra 1% return over the risk-free rate of returns, just by playing the differences in the cash and futures market. But why would one invest in these funds? Especially at a time when the markets are bullish and corporate earnings are in line with the expectations. This is a question that comes straight from the books on behavioural finance. Investors get the feeling that arbitrage funds are completely risk-free even when compared to any kind of debt funds. Most of the investors are institutional or corporate investors and look at risk and return differently than retail investors. Corporate investors prefer these funds to retail investors as their mental heuristics are strongly biased towards that extra 1% return - something that a retail investor would easily let go.

FUND FLAVOUR
March 2010

Versatility in volatility…

Arbitrage Funds are versatile - ideal investment vehicles for those who want debt exposure, to get the tax-break of an equity investment, and to skip the volatility of the equity market. From the point of view of taxation, equity is the most efficient asset class. The dividend income from the equity and long-term capital gains are both tax-free. From the point of view of investment, equities are volatile in nature. Arbitrage funds circumvent volatility by acting like debt funds, but their tax treatment is that of equity diversified funds. Arbitrage funds take advantage of the mispricing between the cash and the derivatives market by going long in the cash market and short in the futures market. In this way, the fund manager hedges the risk. Hence, regardless of market movements, the returns on equity should always be in the green. In a nutshell, while arbitrage funds are classified as equity funds giving you the tax benefit, they do have an exposure to debt and their equity holdings are also hedged. Hence, the volatility associated with equity is conspicuous by its absence.

Risk-free?

There is a popular belief that arbitrage funds are risk-free. But this is a myth… If earning irrespective of the market fluctuations without having to bear any unwarranted risks was so easy, then all of us would have been millionaires. The fact that arbitrage funds rely heavily on the limited number of arbitrage opportunities, authorization in the case of certain funds to go for stocks in case there are no lucrative arbitrage chances, non-convergence in the price of the stock in the cash and futures segments when the futures contract expires, and lack of liquidity (a fund manager may not be able to buy the required number of shares at a predetermined price) can make this strategy highly risky.

Reasonable returns in recession…

You cannot expect mind boggling returns from arbitrage funds. Such funds, by nature, resort to heavy trading resulting in lower arbitrage margins and higher expense ratios. In the stock market debacle of 2008, these funds turned in 8.52 per cent. You may consider this fabulous or mediocre, depending on what you compare this with. If you compare it with equity diversified funds (category average of -55.08 per cent), it stands tall. If you compare it with income funds (category average of 14.30 per cent), it is disappointing.

…augmented the AUM

The average AUM of the arbitrage funds category in February, 2010 stood at Rs 5700 crore, which is a 400 per cent increase from a paltry Rs 1100 crore in July 2008. Kotak Equity Arbitrage fund at Rs 785 crore is the largest arbitrage fund in terms of AUM, with Benchmark Derivative being the smallest at Rs 33 crore. In view of the small size of the futures segment, an increase in the amount of money to be managed, will force arbitrage funds to invest in debt funds which generate lower returns. While some fund houses chose not to accept fresh applications, HDFC, Religare, SBI, Benchmark, IDFC, and JP Morgan accepted fresh applications. Interestingly, Birla Sun Life Mutual Fund launched an arbitrage fund, ‘Birla Sun Life Enhanced Arbitrage Fund’ in June 2009.

Returns rally…

The arbitrage funds have proven to be consistent performers over a period of time. The arbitrage funds gave a return of around 8 per cent even when most other equity funds saw their net asset values (NAVs) falling by over 50 per cent. For arbitrage funds, stock prices are not significant but volumes in futures are of much more importance. In 2008-09, volumes in future trading were about Rs 85,000 core per day and now they have come down to about Rs 15,000 crore per day. For better returns in arbitrage funds, both volatility and volumes are required as they create more investment opportunities. Arbitrage funds gave a positive return of 0.37 per cent for September 2009 and to 0.5 per cent in October 2009. Overall, till the end of October 2009, arbitrage funds gave a return of 4.15 per cent, while their one-year return was 5.71 per cent. The best fund over a one-year period, ending November 2009, is UTI SPrEAD-G with a 7.90 per cent return, while the worst is Benchmark Derivative-G with a 4.15 per cent return. The category average is 5.5 per cent. In January 2010, the one-year and three-year returns were 3.5-6 per cent and 6.5-9 per cent respectively. The arbitrage funds have proved that they perform best, when there is volatility in the market.

…to retain retail interest

Since arbitrage funds enjoy a risk profile akin to that of debt funds or fixed deposits (which is why their returns are benchmarked against that of the money market), investors looking for low-risk investment avenues can consider allocating a portion of their funds parked in debt or fixed deposits in arbitrage funds. Arbitrage funds should be looked at as an alternative to fixed-income funds. Although there is a significant equity component in these funds, you should not compare them with equity funds and expect spectacular returns. These funds might score low on risk involved and liquidity needs. You get an exit window only once every month. However, arbitrage funds render stability to the portfolio and ensure positive returns in periods of panic.

The arbitrage funds are a win-win situation for you. It is the exact remedy for the volatility in the market. You should realize this and make the most of it. Now that you know how to make most of the volatility in the market, get the arbitrage advantage and make volatility pay back to you.