Arbitrage Fund

What is Arbitrage?
 Arbitrage is simultaneous buying and selling the same underlying security or its derivatives in
different market segments to make risk free profits.
 If the price of the same object is different in different markets, you can make risk free profits by
buying the object in the market where price is lower and simultaneously selling it in the market
where price is higher.
 It is important that both the buy and sell transactions are executed simultaneously so that you
can lock-in the profits and not be exposed to price risks.
 Since arbitrageurs aim to make risk free profits the buy and sell positions are totally (100%)
hedged.
 How Arbitrage Opportunities
Arise?
Exchange arbitrage: Price of the same security is different in two stock exchanges e.g. share of a company is trading at Rs 100 in
NSE and Rs 101 in BSE. You can lock-in Rs 1 profit / share by simultaneously buying it in NSE and selling it in BSE.
Index and basket of stocks arbitrage: This is essentially same as cash and carry arbitrage ‒ the only difference is that instead of a
single stock here the arbitrage is for the index. For example, Nifty is trading at Rs 9,300 in the F&O market whereas equivalent
price of a basket of stocks constituting Nifty (in the same proportion as the index) is Rs 9275 in the cash market. You can lock-in Rs
25 profit per Nifty future contract by simultaneously selling Nifty and buying the basket of stocks in the cash market.
Cash and carry arbitrage: Price of the share of a company in the cash market is Rs 1785 and price of the current series future of
the same company in the Futures and Options (F&O) market is Rs 1794. You can lock-in Rs 9 profit / share by simultaneously
buying the share in cash market and selling it in the future market. Cash and carry arbitrage is the most common arbitrage
strategy used by arbitrage mutual funds.
Arbitrage opportunities created by corporate actions/events:
◦ Rights issue: This is announced for a company’s existing investors when it needs more capital. The company gives an option or ‘rights’ to an
existing investor to buy new shares at a discounted price during a certain period. This offers an arbitrage opportunity as the investor can buy
shares at a discount and sell the same when it matches the market price.
◦ Mergers and acquisitions (M&A): Merger arbitrage involves trading in the stocks of two merging firms based on their share swap ratio.
◦ Buy-Back Arbitrage: When the company announces the buy-back of its own shares, there could be opportunities due to price differential in
buyback price and trade price.
Arbitrage Funds versus Debt
Funds
Arbitrage funds Debt Funds
Arbitrage fund returns depend on implied cost Debt fund returns depend on prevailing yields
of carry and mispricing between cash and and interest rate changes.
derivatives market.

Debt funds, excluding overnight funds, can be

Arbitrage funds are 100% hedged. credit risk exposed to credit risk.
may be there in the debt portfolio.

Debt Taxation.
Equity Taxation.
Tax Advantage over Debt Funds
 A major advantage enjoyed by arbitrage funds is that of equity taxation.
 Profits made in debt funds held for less than 36 months is taxed as per the income tax rate of
the investors, profits made in arbitrage funds held for less than 12 months (short term capital
gains) is taxed at 15% plus applicable surcharge and cess.
 If units of arbitrage funds are sold after 12 months from date of purchase then profits (long
term capital gains) of up to Rs 1 lakh are tax exempt in a financial year. Long term capital gains in
excess of Rs 1 lakh are taxed at 10% only.
Why invest in Arbitrage Funds
 Low risk (arbitrage theoretically means risk free profits).
 Low volatility.
 Has the ability to match or outperform low risk debt funds pre-tax returns.
 Ideal for a few months to more than one year investment tenures.
 Tax efficiency (equity taxation).
 Category Average Returns
8.00
7.54
7.15
7.00
7.00
6.63
6.32
6.00 5.91 5.85
5.53
5.14 5.25
5.00 4.68
4.27
4.00

2.33
3.00
2.49
2.03 2.32
2.00 1.91
0.10 1.76
1.00 0.73
0.28
1.00 0.71
0.23
0.00
1-Month Ret (%) 3-Months Ret (%) 6-Months Ret (%) 1-Year Ret (%) 3-Yrs Ret (%) 5-Yrs Ret (%) 10-Yrs Ret (%) YTD Ret (%)

Debt: Liquid Hybrid: Arbitrage Debt: Overnight

Month Funds Mobilized for Repurchase/ Net Inflow Net Assets Under
the month Redemption for the (+ve)/Outflow (-ve) Management
month for the month

April 2020
10,733.29 4,146.24 6,587.05 58,704.98

May 2020
13,263.22 2,457.06 10,806.16 69,310.68

June 2020
8,178.55 4,640.90 3,537.65 72,079.50
 Scheme Name Corpus (In crs.) Expense Ratio
Aditya Birla Sun Life Arbitrage Fund - Growth 4,386.50 0.90
Axis Arbitrage Fund - Reg - Growth 3,227.36 0.99
BNP Paribas Arbitrage Fund - Reg - Growth 808.58 1.00
BOI AXA Arbitrage Fund - Reg - Growth 24.53 1.00
DSP Arbitrage Fund - Reg - Growth 1,146.47 0.93
Edelweiss Arbitrage Fund - Reg - Growth 3,708.09 1.09
Essel Arbitrage Fund - Reg - Growth 0.49 2.25
HDFC Arbitrage Fund - Ret - Growth 5,906.39 0.90
ICICI Prudential Equity - Arbitrage Fund - Reg - Growth 11,212.84 0.93
IDFC Arbitrage Fund - Reg - Growth 8,236.76 1.08
Indiabulls Arbitrage Fund - Reg - Growth 22.43 1.12
Invesco India Arbitrage Fund - Growth 522.47 1.03
JM Arbitrage Fund - Reg - Growth 137.18 1.00
Kotak Equity Arbitrage Fund - Reg - Growth 15,853.46 0.98
L&T Arbitrage Opportunities Fund - Reg - Growth 801.15 0.96
Nippon India Arbitrage Fund - Growth 7,847.21 1.02
PGIM India Arbitrage Fund - Reg - Growth 113.53 1.07
Principal Arbitrage Fund - Reg - Growth 6.13 0.90
SBI Arbitrage Opportunities Fund - Growth 5,045.97 0.90
UTI Arbitrage Fund - Growth 2,985.63 0.93
Total 71,993.18