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Arbitrage funds in vogue for the right reasons
Thu, Sep 17, 2015
Source : Jeni Shukla, Citrus Interactive

An arbitrage fund is a type of hybrid fund that leverages on the difference in the price of a stock in the cash and derivatives market or different stock exchanges, to generate returns. Currently 15 fund houses offer arbitrage funds to Indian investors.

Exponential growth in AUM

The one mutual fund category that has received the highest inflows in the recent months is Arbitrage Funds. Between July 2014 and July 2015 the AUM in this category has more than doubled – has grown by almost 130% - to Rs. 30,269.59 crore.

After the 2014 Union Budget, 5 asset management companies launched their arbitrage funds at different times. These AMCs are L&T, Edelweiss, Indiabulls, Axis and DWS. All the arbitrage funds have been witnessing incremental inflows in the year-to-date period – except for ICICI Prudential Blended – A Fund and ICICI Prudential Blended – B Fund. Year-to-date the highest incremental inflows have come into Reliance Arbitrage Advantage Fund. Its AUM grew from Rs. 283 crore to Rs. 3,109.9 crore in July’15 – a growth of Rs. 2,826 crore or 998%!

Scheme Name

Change in AUM (in Rs. crore) YTD

Reliance Arbitrage Advantage Fund

2826.6

JM Arbitrage Adv Fund

2701.96

ICICI Pru Equity-Arbitrage Fund

2588.47

Kotak Equity Arbitrage Scheme

2286.86

IDFC Arbitrage Fund

1550.45

SBI Arbitrage Opportunities Fund

1518.35

 

What makes arbitrage funds so attractive?

a)      Returns: The funds have delivered compounded annual returns in the range of 7 to 10 per cent without taking on too much risk as seen from the rolling returns –

 

 

1 Year

2 Years

3 Years

5 Years

Arbitrage Fund Category

8.12

8.55

8.45

8.49

Best Performing Fund

9.87

10.47

8.98

9.02

Worst Performing Fund

7.13

7.86

7.9

7.93

  Returns in % as of 31st August, 2015; Figures above 1 year in CAGR terms

In terms of annual calendar returns the arbitrage fund category gave returns of 8.7%, 8.5% and 9.4% in 2012, 2013 and 2014 respectively.

 

b)      Tax Treatment: In the July 2014 Union Budget, the government increased the period for which the short-term capital tax would be applicable on the returns of debt funds from one year to three years. As a result, large investors have been shifting their investments from debt funds to arbitrage funds. For the same level of risk as that of a debt fund, they deliver a superior post-tax return because they are treated like equity funds. Hence there is no long term capital gains tax if the units are redeemed after one year. If the money is parked for less than 1 year short-term capital gains tax of 15% is applicable.

c)       Dividend payouts: For those who wish to have a regular cash income from the investment, it makes sense to opt for the monthly dividend payout option. Schemes like Kotak Equity Arbitrage, ICICI Pru Equity Arbitrage, SBI Arbitrage Opportunities,  IDFC Arbitrage Fund,  IDFC Arbitrage Plus Fund, Axis Enhanced Arbitrage and Birla Sun Life Enhanced Arbitrage Fund have been paying out regular monthly dividends. Dividends are tax free in the hands of investors – which reduces the capital gains tax considerably.

d)      Low exit loads: The exit loads are applicable for a period ranging from 7 days to 3 months in the range of 0.25 to 0.5 per cent.

e)      Low expense ratio: The median expense ratio is 0.99 per cent.

The top 10 best performing schemes in the last 1 year (as on 31st August, 2015) are:

Scheme Name

1 Year Return (%)

ICICI Pru Blended-B-I

9.87

Edelweiss Arbitrage Fund

8.63

Reliance Arbitrage Advantage Fund

8.61

DWS Arbitrage Fund

8.48

Birla SL Enhanced Arbitrage Fund

8.19

Religare Invesco Arbitrage Fund

8.14

L&T Arbitrage Opp Fund

8.11

Kotak Equity Arbitrage Scheme

8.11

SBI Arbitrage Opportunities Fund

8.04

Axis Enhanced Arbitrage Fund

8.01

 

One of the limitations of investing in arbitrage funds is that the returns can get impacted based on the timing of redemption. If you withdraw on a date other than the expiry date, there is a possibility of getting negative returns for that particular month. So it is advisable to exit from arbitrage funds immediately post expiry.

Our view

Arbitrage funds look attractive from a risk-return perspective. These funds can be considered by investors who wish to invest a part of their portfolio in less volatile funds. It also becomes an ideal choice for parking surpluses for a short period of time.

 
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