While Axis MF has launched Axis Enhanced Arbitrage Fund, DWS is planning to launch an arbitrage fund this month. L&T Mutual Fund has also filed draft offer document with SEBI for L&T Arbitrage Opportunity Fund.
After the changes announced in Budget for debt funds, some AMCs have started to launch arbitrage funds. Also, AMCs which already have such funds have started positioning their arbitrage funds as an alternative to debt funds.
While Axis MF has launched Axis Enhanced Arbitrage Fund, DWS is planning to launch their arbitrage fund this month. L&T Mutual Fund has also filed draft offer document with SEBI. IDBI is also planning to file for its arbitrage fund with SEBI.
Edelweiss Mutual Fund had recently come out with its arbitrage fund in June.
A senior official from Axis MF said that the fund house is expanding its range of product suite in the equity category. “We aim to complete our range of product suite in the equity category. Interestingly, the timing is so perfect - we are launching this fund just when tax structure in debt mutual funds has been revised. However, this is merely a coincidence.”
Suresh Soni, Chief Executive Officer, Deutsche Asset and Wealth Management (DWS) told Cafemutual that his fund house is also planning to launch the arbitrage fund in August. DWS Mutual Fund had filed draft offer documents with SEBI in April.
Arbitrage funds take advantage of the difference in prices of shares in cash and derivatives market. They work best in volatile markets as the fund takes opposite position in cash and futures market to make profits. These funds look for events such as share buy backs by companies and dividend declaration for generating arbitrage opportunities. Arbitrage funds are suited for investors with a low risk appetite who wish to take equity exposure for a short period of time.
These funds are treated as equity oriented funds for taxation. Under normal circumstances, these funds deploy majority of its portion in equity and equity related instrument. However, these funds can deploy their money in short term debt or money market securities when the fund manager does not find any arbitrage opportunities. Simply put, the arbitrage funds primarily use hedging strategies.
“Since these funds are treated at par with equity funds for taxation and carry much lower risk than equity funds, investors with an investment horizon of 1 to 2 years should consider these funds. However, they should understand the product first. They should keep in mind the proportion of hedged and unhedged portion in the scheme. Higher hedged portion indicates low risk and vice versa,” says Vidya Bala, Head – Mutual Funds Research, FundsIndia.com.
However some financial advisors have a different view. Gajendra Kothari of Etica Wealth Management is of the view that these funds cannot perform better in a long term. “If you see the past performance of these funds, you will find out that such funds have delivered returns in a range between 3 to 5%. But last year performance of these funds was close to 9% as there were adequate arbitrage opportunities in the market.”
Vinod Jain of Jain Investment said that the arbitrage funds is a better alternative to liquid funds for investors having horizon of 1 month to 1 year. “The returns of arbitrage funds are quite volatile. Hence, for a long term, it is certainly not a good product but arbitrage funds do provide better taxation benefit.”
A Mumbai based financial advisor, Debashish Chatterjee seconds the view and said that investors having horizon of 1 month to 9 months can consider arbitrage funds. He said that investors can get good tax free return if they opt for dividend option.
