Arbitrage funds have seen keen interest and investments in the last 6 months. Owing to the crisis in some debt funds, many investors have moved their fixed income portfolios to arbitrage funds.
Let us understand what arbitrage funds are before looking at the best in this category.
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What are Arbitrage Funds?
Arbitrage funds are categorized under the hybrid fund category and are unique in the way they generate returns. Arbitrage funds buy and sell stocks in the cash and futures market, thereby generating returns from the difference in the price of the stock in the cash and futures market. The returns from arbitrage funds are equivalent to those from short term debt funds. They are relatively safer than debt funds since they do not carry any interest rate or credit risk. Also, these funds carry a lower tax burden for the investor since for taxation they are treated as equity funds. For arbitrage funds to deliver returns better than debt funds, enough arbitrage opportunities need to be present in terms of mispricing in the cash and futures market. There can be times when arbitrage funds deliver returns lower than debt funds owing to a lack of arbitrage opportunities.
Three Best Performing Arbitrage Funds
Edelweiss Arbitrage Fund
Edelweiss Arbitrage Fund is offered by Edelweiss mutual fund. This fund was launched on 27th June 2014 and the benchmark is Nifty 50 Arbitrage. The AUM of this fund is INR 3,076 crores and is rated five stars by Value Research. The fund has 87 stocks in the equity portion most of which are large caps. This fund has been a consistent performer since its inception.
Kotak Equity Arbitrage Fund
Kotak Equity Arbitrage is offered by Kotak Mutual Fund. This fund was launched on 29th Sep 2005 and has returned an impressive 7.34% since inception. The benchmark of this fund is also Nifty 50 arbitrage and the current AUM is INR 14,663 crores. The fund has 112 stocks in the portfolio and has been one of the best performers and is rated five stars by Value Research.
Nippon India Arbitrage Fund
This fund was earlier called Reliance Arbitrage Fund, but the name got changed to Nippon India Arbitrage Fund post Nippon AMC’s buyout of Reliance AMC. This fund was launched on 14th Oct 2010 and has returned 7.61% since inception. The benchmark is Nifty 50 Arbitrage and the current AUM is INR 7,068 crores. The equity portion has 99 stocks and the fund is rated five stars by Value Research.
Let us look at the returns of these funds (in % returns):
|Fund Name||Last 1 Year||Last 3 Years||Last 5 Years|
As we can see the returns have been in line with the returns of liquid and overnight funds, which are the safest category of debt funds. The added advantage being the tax efficiency of arbitrage funds. We would recommend you to invest a portion of your portfolio, which you want to be a risk-free investment, in arbitrage funds. You can choose any three of these funds or split among the three.