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Arbitrage Quandary

The size of the fund has a major role to play in generating returns

Why is there so much difference in returns of various arbitrage funds?

Returns generated by Arbitrage funds mainly depend on the efficiency of the fund manager. On how best he has capitalised on arbitrage opportunities. As funds grow bigger in size, fund managers find it difficult to manage them. If a fund manager has a Rs 100 crore fund, he can naturally capitalise on arbitrage opportunities in a better manner. But a manager who is managing a fund of Rs 1,000 crore, would need a larger arbitrage opportunity to be able to capitalize on it. So I think, large size constrains the returns capacity.
Also, the arbitrage fund’s expenses are just like equity funds, though the former gives returns like a fixed income fund. Arbitrage funds also invest in fixed income if they have sufficient arbitrage opportunities. But the underlying assets, which are equities and derivatives makes managing them quite a tough ask and makes expenses of these funds just like those of equity funds (annual expenses might touch 2.25 per cent).

Should I invest Rs 10,000 for five years in LIC Profit Plus?

If investment is your focus, then do not invest in Profit Plus. This is a unit-linked investment plan (ULIP). A good mutual fund is a better option as it would not be as costly. Select a good fund and open an SIP account for Rs 1,000 monthly or even Rs 2,500 in three months and the returns that you will get in five years, would be better than Profit Plus. Off course, this would entirely be connected to the markets and there would be better liquidity, but the markets have managed to perform better over such time frames. Within this period, your low cost factor would show in your investments. However be the markets, any open end fund would give better returns than Profit Plus in terms of low cost.

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