After the changes in tax structure of debt funds, four fund houses have launched arbitrage funds to provide investors a tax efficient option to park their short term surplus.
After L&T, Axis and Edelweiss, Deutsche has come out with its arbitrage fund. After the changes in debt funds tax structure, the once lesser known category is suddenly in the limelight. In just about three months four fund houses have come up with arbitrage funds. DSP Black Rock too is planning to file offer document for an arbitrage fund.
Cafemutual had first reported that JM Financial Mutual Fund which introduced an annual bonus option in its arbitrage fund was lapped up by institutional investors who poured in nearly Rs. 5,400 crore in the fund. Read here.
Close on the heels of the response to JM Financial Arbitrage Fund, Deutsche is planning to launch its arbitrage fund on August 13. The scheme will charge an exit load of 0.50 % if redeemed within 90 days of allotment and nil, if redeemed subsequent to 90 days of allotment of units.
According to a press release issued by the fund house, the fund will use cash futures arbitrage strategy i.e. it will buy a stock in the cash market and sell it in the futures, resulting in a hedge where the fund portfolio has locked in a spread and is not affected by the price movements in the spot and futures markets. Arbitrage funds have the potential to earn higher post tax returns vis-à-vis debt and money market funds for investors.
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%.
Arbitrage
funds is a small category as of now. There are 14 funds which collectively
manage nearly Rs. 4,600 crore as on June 2014. As on July the AUM of this
category grew to more than Rs. 10,000 crore (Half of which has come in JM’s
Arbitrage Fund). Edelweiss Mutual Fund’s Arbitrage Fund which collected Rs. 60
crore from its NFO in June has now grown double to Rs. 120 crore.
"I think the category will grow further as these funds offer many advantages. However, it is unlikely that the entire liquid and ultra short term money will flow in these funds. Beyond mutual funds, the arbitrage market's size is around Rs. 50,000 crore. If stock exchanges start offering more stocks in this segment then then the demand for such funds will go up. Arbitrage funds will take some time get popular," said Vikaas Sachdeva, CEO, Edelweiss Mutual Fund.
However, advisors are of the view that this category may not gain a sizeable AUM because of the lack of markets capacity to absorb large inflows.
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. However, this category may not grow substantially as compared to liquid or ultra-short term funds.”
He says that the money which used to come in ultra-short term funds and liquid funds may not come in arbitrage funds since these funds have an exit load for three months.
Liquid funds do not have any exit loads while some ultra-short term funds have exit loads for a very short duration. Most ultra-short term funds do not charge any exit load.
“Arbitrage funds only have capacity to deploy Rs. 8,000 to Rs. 10,000 crore in the market. It is unlikely that this category will grow further,” says D P Singh, CMO (Domestic Markets), SBI Mutual Fund.
Do you think the changes in debt funds would attract more investors towards arbitrage funds? Let us know your thoughts.
