Arbitrage Funds started gaining traction in India when liquid funds gains started getting taxed. In this post we look at Best Arbitrage Funds to Invest in India. 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. It’s investment strategy to generate a return with less risk and taxation benefits have attracted a large number of investors. Arbitrage Funds gains profit from the difference in price of security in various markets.
Things to know before investing in Arbitrage Funds
- The 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.
- The gains are tax-free for the investment period of one year and more and for dividend option, dividend distribution tax is not applicable on dividend declared by fund
- The fund is not a substitute of the debt fund, both have different investment objective with different risk factors.
- Not all the time arbitrage opportunity is present in market, then at that time it considers increasing the limit of debt securities in the portfolio
Best Arbitrage Funds to Invest in India
- Reliance Arbitrage Advantage Fund
- Kotak Equity Arbitrage Fund
- IDFC Arbitrage Fund
- SBI Arbitrage Opportunity Fund
- ICICI Pru Equity Arbitrage Fund
- Birla SL Enhanced Arbitrage Fund
- IDFC Arbitrage Plus Fund
- Edelweiss Arbitrage Fund
The fund’s objective is to generate income by taking advantage of the arbitrage opportunities that potentially exists between cash and derivative market and within the derivative segment along with investments in debt securities & money market instruments.
The equity portfolio of the fund is completely hedged on various markets simultaneously. It follows a market neutral strategy with no equity risk. When there is less opportunity for arbitrage, it invests in short-term debt and money market fund. The fund has CAGR of 8.30% since inception and yearly return for 2014, 2015 and 2016 is 7.96%, 8.06%, and 6.59% respectively.
It’s 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 & futures market, and also through the deployment of surplus cash in fixed income instruments.
The fund 60% of the corpus is deployed in arbitrage trades and rest is invested in FD, debt funds & securities. The fund has given annualized return of 7.66% since inception (Sep. 2005).
The objective of the scheme 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 68% of the portfolio and 31.3% is in debt and money market securities. The fund is launched in Dec 2006, has given 7.33% since its launch. Total AUM of the fund is Rs. 2621 crore.
SBI Arbitrage Opportunity Fund
The fund aims to provide capital appreciation and regular income for unit holders by identifying profitable arbitrage opportunities between the spot and derivative market segments as also through the investment of surplus cash in debt and money market instruments.
The scheme will invest 65-85% of its assets in equities and equity derivatives and the rest in debt and money market instruments. In the last one year, it has underperformed the category. It has exit load of 0.50% for redemption within 30 days.
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 in long period time and has given annualized return of 7.85% since inception (Dec 2006). The fund has AUM of Rs. 7185 crore.
The fund’s objective is to generate income by investing in equity and equity related instruments and take advantage of the price differentials or mispricing prevailing in a stock or index. The asset composition of the fund 65-90% in equity and equity-linked securities, 65-90% in the derivatives market, and 10-35% in debt securities. When there is no opportunity in arbitrage, it increases position in debt portfolio. The fund has given a annualized return of 7.03% since inception (July 2009) and has AUM at Rs. 2515 crore.
The fund aims 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 instrument.
Arbitrage Plus funds are different from other pure arbitrage funds because it invests 5% of their portfolio in riskier strategies and is more volatile than other arbitrage funds. The fund is launched in June 2008 and has AUM of Rs 695 crore.
The investment objective of the Scheme is to generate income by predominantly investing in arbitrage opportunities in the cash and 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 is new in the category and is launched in June 2014. The fund’s return has less variation against the category return. Its annualised return is 7.41% since inception.
List of funds is arrived after comparing different funds from the same category. Only those funds are selected which are consistent in terms of performance.
-This blog post should not be constituted as an advice and investors are requested to do their own due diligence before investing into any of the above-mentioned funds. You can also try out Bodhik to get the funds best suited to your profile
** – All the numbers are as of writing of this post i.e 13th April 2017.