At a time when domestic mutual funds continue to aggressively scramble for more money to boost their asset base, they have made an exception for one category — arbitrage funds. Several top arbitrage schemes of mutual funds have stopped accepting fresh money from investors, as lack of sufficient arbitrage opportunities between the cash and futures markets have made it tedious for them to generate competitive returns to the existing unitholders itself.
Top schemes in the category, including Kotak Equity Arbitrage, UTI Spread, ICICI Prudential’s Blended Plans and Equity and Derivative Income Optimiser Plans, are no longer taking money, officials at these mutual funds told ET. Mutual fund distributors said HDFC Arbitrage, IDFC Arbitrage Plans and JM Arbitrage Advantage have also been closed to fresh subscriptions, though this could not be independently verified with them.
Sandesh Kirkire, CEO of Kotak Mutual Fund, which manages the biggest arbitrage fund of roughly Rs 1,000 crore, said: “We decided to stop accepting fresh money, keeping in mind the interests of the existing holders because the market is hardly conducive for arbitrage.”
Arbitrage schemes, considered relatively risk-free, aim to profit from the pricing anomalies between shares and equity futures. While they use at least 65% of their fund corpus to take advantage of such pricing anomalies, these hybrid schemes are structured to invest up to 35% of their corpus in money market papers such as certificate of deposits and commercial paper.
Arbitrage opportunities are at its best in a bull market, when futures trade at a premium to the underlying shares or indices. This allows traders to buy the underlying and sell futures. Analysts say nowadays, futures are mostly trading at a discount to the underlying, resulting in fewer opportunities to cash in on the price differentials. The interest rate scenario of late has also not been favourable for these funds, unlike last year when they switched to money market instruments to sustain returns in the absence of arbitrage opportunities. In the bull run, these schemes aimed at returning 9-11%, but in the last year, average returns from this category have been roughly 7%, according to Value Research, a mutual fund tracker.
Funds fear that the returns from this category would shrink further if assets grew more, with these schemes finding favour among the risk-averse investors, amid the existing uncertainty.
“It did not make sense to accept more applications at the expense of the existing unitholders. This is a temporary measure,” said Nilesh Shah, deputy MD and CIO of ICICI Prudential Asset Management.
Top schemes in the category, including Kotak Equity Arbitrage, UTI Spread, ICICI Prudential’s Blended Plans and Equity and Derivative Income Optimiser Plans, are no longer taking money, officials at these mutual funds told ET. Mutual fund distributors said HDFC Arbitrage, IDFC Arbitrage Plans and JM Arbitrage Advantage have also been closed to fresh subscriptions, though this could not be independently verified with them.
Sandesh Kirkire, CEO of Kotak Mutual Fund, which manages the biggest arbitrage fund of roughly Rs 1,000 crore, said: “We decided to stop accepting fresh money, keeping in mind the interests of the existing holders because the market is hardly conducive for arbitrage.”
Arbitrage schemes, considered relatively risk-free, aim to profit from the pricing anomalies between shares and equity futures. While they use at least 65% of their fund corpus to take advantage of such pricing anomalies, these hybrid schemes are structured to invest up to 35% of their corpus in money market papers such as certificate of deposits and commercial paper.
Arbitrage opportunities are at its best in a bull market, when futures trade at a premium to the underlying shares or indices. This allows traders to buy the underlying and sell futures. Analysts say nowadays, futures are mostly trading at a discount to the underlying, resulting in fewer opportunities to cash in on the price differentials. The interest rate scenario of late has also not been favourable for these funds, unlike last year when they switched to money market instruments to sustain returns in the absence of arbitrage opportunities. In the bull run, these schemes aimed at returning 9-11%, but in the last year, average returns from this category have been roughly 7%, according to Value Research, a mutual fund tracker.
Funds fear that the returns from this category would shrink further if assets grew more, with these schemes finding favour among the risk-averse investors, amid the existing uncertainty.
“It did not make sense to accept more applications at the expense of the existing unitholders. This is a temporary measure,” said Nilesh Shah, deputy MD and CIO of ICICI Prudential Asset Management.
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