Arbitrage MFs: Arbitrage MFs’ record run may hit poll bump, experts favour caution


ET Intelligence Group: Arbitrage funds received an inflow of ₹10,645 crore in December 2023, the highest monthly flow in nearly two-and-a-half years, according to the data from the Association of Mutual Funds in India (AMFI). The previous peak of ₹14,924 crore was in July 2021. Improving returns in the past three years, attractive post-tax returns since they are treated as equity schemes and increasing awareness about the advantages of these funds are a few key reasons for the improving inflows.

A fund manager of an arbitrage fund earns the difference between a company’s share price in the cash or spot market and futures market.

Arbitrage funds have started yielding better returns amid the bullish market sentiment. “In the past three years, returns from these schemes have improved to 7-7.5% from 3-4%,” said Rupesh Bhansali, head of mutual funds at GEPL Capital, adding that at least 10% of investors in arbitrage funds are from the retail category.

These schemes also attract high net-worth individuals (HNIs) and institutional investors given the tax treatment. Returns on arbitrage funds for less than one year attract 15% tax and 10% for returns for more than one year making them on par with equity schemes. Distributors point out that the post-tax returns on arbitrage funds have been reasonably attractive when compared with returns generated by fixed deposits and debt funds. Interest income on fixed deposits and capital gains on the debt funds are taxed at the marginal tax rate or the slab rate of the taxpayer. At present on a post-tax basis, arbitrage funds generate on average 5.8% return compared with 3.3% for fixed deposits and 4.6% for debt funds.

Since arbitrage funds capture the price difference of a stock in spot and future markets, they tend to do well in bullish phases. In 2023, the S&P BSE Sensex earned 18.3% return while these funds recorded an inflow of ₹58,988.7 crore. In the previous year, the index gained 1.8%. The same year, arbitrage funds reported an outflow of ₹31,310 crore.For 2024, distributors advise caution while investing in these schemes. “Since 2024 is an election year, the market volatility will be high. If the markets fall, then there will be outflows from arbitrage funds,” said a distributor who did not wish to be named. The distributor added that it is possible that balanced advantage funds (BAF) may trim their exposure to arbitrage funds in favour of equities. Balanced advantage schemes invest close to 15% of their money in arbitrage funds. If their assets under management of balanded advantage funds are taken into account, this amounts to an investment of around ₹35,000 crore.



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