If you thought that the record inflows in equity funds is largely due to participation of retail investors you would be mistaken. AMFI’s internal data, which is with fund houses shows that arbitrage funds account for 37% of the total inflows in equity funds for the last two months.
Of the total 31,500 crore received by the MF industry Rs.11,500 crore came in arbitrage funds in July and August 2017. The industry has received net inflows of Rs.5,225 crore and 6,303 crore in arbitrage funds in August and July respectively. In June, the industry saw net outflows of Rs.2,406 crore due to quarter end. Many corporate investors invest in arbitrage funds for tax planning purposes.
The data also shows that arbitrage funds constitute 24% of total gross sales under equity funds in August. In fact, AUM of arbitrage funds stood at Rs.50,445 crore which is 9% of the total equity AUM of 5.74 lakh crore as on August 2017.
Experts says arbitrage funds have gained popularity among investors due to recent market volatility and favourable tax treatment.
Source: AMFI
D.P Singh, CMO, SBI Mutual Fund says that many large investors have found arbitrage funds as a better alternative to liquid funds and ultra-short term funds as these funds are taxed like equity funds. “Conservative investors who are looking for debt-like returns with low risk and tax benefits are investing in arbitrage funds,” says Singh.
Another reason behind popularity of arbitrage funds is predictable returns. “The returns from arbitrage funds hover around repo rate. If the repo rate is around 6% then investors can expect returns in the range between 5.75% and 6.25%,” said Singh.
Singh further adds that inflows in arbitrage funds are also subject to the spread between the cash and future markets. “Most of the corporate investors look at the spread between cash and future markets to invest in arbitrage funds,” says Singh.
However, Singh believes that higher inflows in arbitrage funds will reduce such a spread. “Higher inflows reduce market volatility as this affects the spread between cash and future markets. In my view, arbitrage funds can only sustain inflows of up to Rs.15,000 crore in the current market scenario.”
Rajesh Patwardhan, CMO, LIC Mutual Fund seconds Singh’s view and says, “In the rising market scenario, the spread in the derivative market becomes attractive. Many HNIs and corporates have invested in arbitrage funds for short term,” says Rajesh.
Mumbai-based Vinod Jain of Jain Investments says that HNIs and ultra HNIs use arbitrage funds to park their excess funds. “Considering the volatility in markets, some investors think that it is better to park money in arbitrage funds as these funds are relatively safer and provide tax free returns if held for a year or more,” says Vinod.
