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Stalling Subscriptions

Arbitrage funds take advantage of discrepancies in the cash and future market

One would think that mutual funds are always on the lookout to increase their assets under management (AUM). But here are three funds that have actually stopped accepting fresh investments into their schemes.

Kotak Equity Arbitrage, ICICI Prudential Blended Plan A and ICICI Prudential Equity and Derivative Income Optimiser Plan (both retail and institutional plans) — all arbitrage funds — have suspended new sales. However, existing investors who had chosen the Systematic Investment Plan (SIP) or Systematic Transfer Plan (STP) can continue to invest. So from July 1, 2009, fresh purchases, additional purchases and switch-ins are not permitted.

What could be the reason behind such a move? Generally, it has been observed that when the asset size of a fund grows, the fund manager finds a decrease in manoeuvrability and finds it all the more difficult to exploit newer  investment opportunities, especially arbitrage ones. With flexibility lost, Kotak Equity Arbitrage has been transparent enough to state that both the prevailing market situation, coupled with the large size of the fund, has led them to suspend the fresh purchases.

The average AUM of the arbitrage funds category in the month of June stood at Rs 4,920 crore, which is a 97 per cent increased from March 2009 (Rs 2,425 crore). Kotak Equity Arbitrage fund was the largest (Rs 821 crore) in terms of AAUM, streets ahead of UTI SPrEAD, the second largest (Rs 595 crore).  ICICI Prudential Equity and Derivative Income Optimiser Plan and ICICI Prudential Blended Plan A are much smaller with assets of Rs 323 crore and Rs 307 crore, respectively.

But this is not just disappointing for new investors. Current investors have a new issue to deal with. These funds are categorised as equity and get the same tax treatment as other equity funds.

Now arbitrage funds take advantage of price discrepancies (of the same stock) in the cash and futures market. But with no viable equity opportunities present, the funds may park their surpluses in debt. Naturally, if the fundamental character of the fund changes, so will the tax implications. In a debt fund, long-term capital gains are no longer tax free and stand at 10 per cent (without indexation) or 20 per cent (with indexation). Not a very happy change of events.


Closing Time?
    Return (%)      Asset breakup (%) *      
Scheme  1Mth  3Mth  1Yr  Equity  Debt  Derivatives  AAUM (Cr)  Subscription Status
Benchmark Derivative # 0.46 1.20 6.00 65.62 34.37 -65.94 16.13 Open
Benchmark Equity & Derivative Opp # 0.50 1.13 6.15 66.08 33.92 -66.29 64.00 Open
HDFC Arbitrage Retail 0.57 1.42 7.25 70.48 0.39 29.13 203.84 Open
HDFC Arbitrage Wholesale 0.59 1.49 7.51 70.48 0.39 29.13 450.09 Open
ICICI Pru Eq & Der Income Optimiser Inst 1.22 2.14 7.43 62.16 37.84 -66.95 158.26 Closed
ICICI Pru Eq & Der Income Optimiser Ret 1.23 2.07 7.03 62.16 37.84 -66.95 165.99 Closed
ICICI Prudential Blended Plan A 0.55 1.40 7.25 65.06 34.94 -65.10 307.80 Closed
IDFC Arbitrage Plan A 0.68 1.11 5.86 66.79 33.21 -66.84 124.09 Open
IDFC Arbitrage Plan B 0.72 1.24 6.40 66.79 33.21 -66.84 299.68 Open
IDFC Arbitrage Plus Plan A 0.99 1.01 8.16 66.24 33.76 -63.49 310.03 Open
IDFC Arbitrage Plus Plan B 1.01 1.08 8.18 66.24 33.76 -63.49 131.89 Open
JM Arbitrage Advantage 0.70 1.58 7.18 65.75 34.25 -68.22 543.18 Open
JP Morgan India Alpha 0.62 1.82 - 0.86 - -0.86 86.23 Open
Kotak Equity Arbitrage 0.76 1.66 7.58 61.60 99.94 -61.54 821.35 Closed
Religare Arbitrage 0.75 1.61 6.93 64.12 35.88  - 171.82 Open
SBI Arbitrage Opportunities 0.65 1.42 6.84 65.06 34.94  - 460.50 Open
UTI SPrEAD 1.05 2.57 10.16 69.32 30.70 -69.28 595.40 Open
Returns as on July 10, 2009
Holdings related data as on 30th June 2009
# Holdings related data as on 31st May 2009
* as per disclosure by individual fund houses

The article appeared in the July 15, 2009-August 14, 2009 issue of Mutual Fund Insight magazine