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Opportunities Drying Up for Arbitrage Funds

Arbitrage funds have taken a hit because of shrinking arbitrage opportunities. Is it time for you to exit them?

Many investors are wondering whether it is time to say good-bye to arbitrage funds as they ponder over their lacklusture performance in the last six months. Arbitrage funds became the hot favourite of investors after the last year's interim Budget when the finance minister hiked the long-term capital gains tax and the lock-in period on debt funds. Investors had started investing in arbitrage funds, which look to exploit the arbitrage opportunity between the cash and future markets.

As widely expected, the performance of these schemes has started suffering lately. They have underperformed other debt schemes in the last six months. Arbitrage funds have offered 4.14 per cent in the last six months as compared to the 4.22 per cent by liquid funds, 5.65 per cent by short-term funds and 8.33 per cent by income funds during the same period.

Many investment experts have been apprehensive that huge inflows into these schemes are likely to dry up arbitrage opportunities available in the market and this will adversely impact the performance of these schemes.

"As far the performance of these schemes is concerned, it is likely that arbitrage opportunities may come down in future and this may reduce the returns," says Suresh Sadagopan, Principal Planner, Ladder 7 Financial Advisories, a wealth management firm. "I believe these funds may still give 6-8 per cent returns in future, which is quite good if you consider the tax advantage they have now."

The table below lists some arbitrage funds and how they have fared over three months, six months and one year. The table also lists the assets under management of these schemes.

Arbitrage funds and their returns

Scheme nameReturns (%) 3 months6 months1 yearAssets (₹cr)
Axis Enhanced Arbitrage Fund2.074.14-69.39
Birla Sun Life Enhanced Arbitrage Fund2.264.497.91143.33
DWS Arbitrage Fund2.124.13-169.31
Edelweiss Arbitrage Fund2.314.51-432.46
HDFC Arbitrage Fund1.973.917.989.01
ICICI Prudential Blended Plan - Plan A2.143.958.57674.35
ICICI Prudential Equity Arbitrage Fund2.174.088.71273.28
IDFC Arbitrage Fund2.134.058.522575.67
IDFC Arbitrage Plus Fund2.033.958.05663.19
Indiabulls Arbitrage Fund2.29--25.17
JM Arbitrage Advantage Fund2.043.898.313083.12
Kotak Equity Arbitrage Fund2.084.118.832879.19
L&T Arbitrage Opportunities Fund2.134.16-153.58
Reliance Arbitrage Advantage Fund2.394.578.54709.12
Religare Invesco Arbitrage Fund2.194.198.55442.46
SBI Arbitrage Opportunities Fund2.214.198.77454.48
UTI SPrEAD Fund2.24.098.2748.07
Returns as on April 10, 2015; assets as on March 31, 2015