Though classified as an arbitrage fund, the fund's mandate limits its equity investment to 49 per cent. Hence investment in this fund is always going to be treated (for tax purposes) as a debt fund.
There are two factors that work against this fund. Its performance is far from consistent. In 2006 and 2008, it was at the bottom of the category. Yet, in 2007, it topped with a return of 9.52 per cent. Moreover, its high expense ratio of 1.5 per cent has not helped. Considering that it has been fully into debt since December 2007, such a high expense ratio does not seem justified.
The fund began with Rs 365 crore (May 2005) of assets under management. But after August 2006, there was virtually a run on the fund and its asset base was eroded by 93.52 per cent between September 2006 to March 2009.
Since December 2007, the fund has kept 65.79 per cent in debt and the rest in money market instruments. Over the past few months, the fund has invested in certificate of deposits (CDs) of banks like ICICI Bank, State Bank of Mysore, Punjab National Bank and Yes Bank.