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Birla Sun Life Arbitrage Fund

Arbitrage funds provide steady low-risk income. Birla Sun Life has increased options in this category

Recently, Birla Sun Life filed an offer document to launch an arbitrage fund. The new arbitrage has been named Birla Sun Life Enhanced Arbitrage Fund. Seeing the word 'Enhanced' in the fund's name might have raised a few questions in your mind. It did in our minds as well. When Birla Sun Life's Chief Investment Officer, Mr. A. Balasubramanium was asked about it, he said, “It will be an arbitrage fund which is likely to produce returns above very short-term maturity debt.”

Birla Sun Life runs a wide array of fixed income funds and has around Rs. 28,331 crores invested in its nearly 100 fixed income funds. However, an arbitrage fund was amiss in its product offering.

For the record, arbitrage funds generate fixed income by capitalizing on the arbitrage opportunities created in the cash and equity derivative markets. The fund typically takes advantage of the price differential or mis-pricing prevailing for the stocks in the cash and future market. These funds prove to be useful for risk averse investors seeking above average fixed income.

The other advantage of arbitrage funds is their tax efficiency. The gains from a fund held for 1 year or dividend from these funds is tax-free as technically it is an equity fund. Though the nature of gain and on the dimension of risk, it is more like to a bond fund.

The first arbitrage fund launched was the Benchmark Derivative Fund in December 2004. The 11 arbitrage funds in India have Rs 4,200 crores invested in them, as on March 31, 2008. These funds gave an average return of above 8.6 per cent over the past 1-year, and 1.4 per cent over the past 3-months. This looks better compared to the average 1 year return of 7.4 per cent from a cash fund. It also did better than medium term debt fund which gave a 7.3 per cent in the past one -year and 0.2 per cent in the past 3 months.

These statistics exemplify the point that arbitrage funds are a good option for low-risk investors as compared to cash or debt funds. Birla Sun Life's new arbitrage fund hence becomes an investment option worth considering.