Arbitrage funds, which gained popularity after the changes in tax structure of debt funds, received net inflows of Rs. 8,359 crore which was 12% of the Rs. 67,611 crore net inflows received by equity funds in FY15-16, shows AMFI data.
What has made arbitrage funds gain sudden popularity is the tax structure and relatively low risk nature of the category. Since arbitrage funds deploy 65% in equity, these are classified as equity funds. The hedging strategy reduces the risk. Moreover, the dividends are not subject to dividend distribution tax. Short term capital gains tax (if investors redeem before 12 months) are taxed at 15%.
Value Research data shows that the category posted 7% absolute return over a one year period. The attractive returns has made investors rush to this category as the assets of arbitrage funds have grown by 28% from Rs. 18,170 crore in April 2015 to Rs. 23,245 crore in March 2016.
Hemant Rustagi of Wiseinvest Advisors feels that the growth of this category would depend on the level of awareness it creates among investors. “From a tax perspective, arbitrage funds are ideal for a time horizon of three months to less than a year, especially for individuals in the highest tax bracket. These funds can give good returns provided there any opportunities in the market.”
While some say that arbitrage funds may not be able to match the past returns going ahead due to the rapid growth in AUM in the category, others believe that these funds will continue to offer attractive returns.
Manoj Nagpal, CEO of Outlook Asia Captial believes that arbitrage funds may post higher returns in the months to come as the spread between the cash and future markets has increased from 50 basis points in 2015 to 80 basis points in April 2016. “With the spread between cash and futures increasing we believe that arbitrage funds can offer better post tax returns as compared to liquid funds.”
“FIIs and prop books are big players in the arbitrage market. Their market size is around Rs. 1 lakh crore. Mutual funds are a very small (Rs. 25,106 crore) part of this market. Even if the returns were to diminish, FIIs will be first to move out of the market so the category will shrink automatically,” adds Manoj.
While the category has grown in the last one year, these funds are seeing continuous outflows since the last four months. Arbitrage funds saw an average of Rs. 2,000 crore net outflows each month since December 2015. This is particularly due to outflows from a few schemes. For instance, JM Arbitrage Fund’s AUM fell from Rs. 5,311 crore in December 2015 to Rs. 1,845 crore as on March 2016. Similarly, SBI Arbitrage Opportunities Fund’s AUM fell from Rs. 1,755 in November 2015 to Rs. 1,208 as on March 2015.
As on March 2016, there are 18 arbitrage funds which collectively manage Rs. 25,106 crore.
