Mirae Asset Arbitrage Fund

Mirae Asset Arbitrage Fund NFO – Review

Mirae Asset Mutual Fund is launching a new fund. Let’s review Mirae Asset Arbitrage Fund NFO today. What is an Arbitrage Fund? Should you invest in it? Or there are better options? NFO opened on 3rd June and closes on 12th June 2020. Since this is an open-ended scheme, even if you don’t invest now, it will be open for normal subscription on 22nd June 2020. Let us try to understand this new fund and is it suitable for you.

1. Arbitrage Fund? What does it mean

Since Mirae Asset Arbitrage Fund is a arbitrage fund as name suggests, lets understand what does that mean. Arbitrage fund try to take advantage of same asset having different prices in two different locations. So they try to buy and sell same asset and try to pocket the difference as profit.

Let us assume you have a old book store. Someone comes and informs he is interested in buying a particular book for Rs. 100. You note down his contact. Few days later someone comes and offers to sell same book at Rs. 90. You call up first person and ask if he is still interested and ask him to pay you Rs. 100. Same day you pay seller Rs. 90 and buy book. So you buy from first one at Rs. 90 and at same time sell it at Rs. 100 to other. This way you pocket profit of Rs. 10. All you did is took advantage of price difference in buying and selling.

You have to note there is difference compared to normal selling. In normal selling, you stock the book upfront, you take the risk of book even not getting sold for long time etc. In case of arbitrage, you are trying to buy and sell at same time. So risk is very little compared to normal buying and selling.

How does it work actually in case of Arbitrage Mutual Fund

In case of Arbitrage Mutual fund, opportunities are checked across say different stock exchange. Say HDFC Bank share is available in BSE for Rs 995 and same is available at Rs. 997 in NSE. Fund will try to buy same quantity of shares from BSE and sell it on NSE at same time. This way it can profit Rs. 2 per share.

Similarly let us say stock is available at Rs 995. In Future market, say it is available at Rs 1025. The fund buys shares from the cash market and creates a futures contract to sell the shares at Rs 1,025. Once contract expires, fund sells the stocks in the futures market and books a profit of Rs. 30 per share ( 1025 minus 995 & transaction cost).

As you see, risk is very less and even returns are not that high as price differences are generally small in such cases.

2. Why we need Arbitrage Fund

Arbitrage funds are low risk – low return type Mutual Fund. If you want to park money for say a year or so, they offer little better returns than Liquid Funds. Also technically they are treated as Equity Funds. So you get tax advantage over liquid funds. If you want to invest some money for a goal in a year, this type of fund can be low risk tax efficient option for you.

3. Risks and returns for Mirae Asset Arbitrage Fund

Though underlying asset is equity, understand the way arbitrage fund works. It is buying and selling same asset at same time. So risk is low but of course not zero. Sometimes (especially times like Covid-19) there is sudden drop in stock prices in short period and futures could be at lower price compared to current price. This can impact returns of the fund. But if you generally hold for a period of a year or so, you can get normal returns.

You can click here to see returns of existing arbitrage funds. You can see most of them are in range of 5 to 7 % per year. This is not great but remember these funds are more of alternative to liquid funds and not to equity funds.

You can see risk stats here. Standard deviation is around 0.5 to 0.6 which means its very stable return and hardly any volatility.

4. People behind Mirae Asset Arbitrage Fund

The Fund Managers are Jignesh Rao and Jigar Shethia (Equity). As per Scheme information document, none of them manage any funds currently with Mirae Asset Fund. Mahendra Jajoo will manage debt portion of fund and he has lot of experience. However in arbitrage fund, role for managing debt is of limited significance. So overall there is nothing great to write about . Also with advance computational techniques, arbitrage opportunities are identified more by systems than human. So not that great role to play for a fund manager here anyway.

5. Strategies of Mirae Asset Arbitrage Fund

As per scheme information document, fund would try to make profit by using some of the arbitrage opportunities like below (list is not exhaustive).

Index/ Stock spot – Index/ Stock Futures

This strategy is employed when the price of the future is trading at premium to the price of its
underlying in spot market. The Scheme shall buy the stock in spot market and endeavour to
simultaneously sell the future at a premium on a quantity neutral basis.

Index Arbitrage

The Nifty 50 derives its value from fifty constituent stocks; the constituent stocks (in their respective weights) can be used to create a synthetic index matching the Nifty Index. Theoretically, the pricing of Nifty Index futures should be equal to the pricing of the synthetic
index created by futures on the underlying stocks. Practically however the index futures may not exactly correspond to the synthetic index futures. The Nifty Index futures normally trades at a discount to the synthetic Index due to large volumes of stock hedging being done using the Nifty Index futures giving rise to arbitrage opportunities.

Dividend Arbitrage

At the time of declaration of dividend, the stock futures / options market can provide a profitable opportunity. Generally, the stock prices decline by the dividend amount when the stock becomes ex-dividend.

Buy-Back/ Open Offer Arbitrage

When the Company announces the buy-back or open offer of its own shares, there could be
opportunities due to price differential in buyback price and traded price

Merger

When the Company announces any merger, amalgamation, hive off, de-merger, etc, there could be opportunities due to price differential in the cash and the derivative market.

6. Who are peers of Mirae Asset Arbitrage Fund

Notable peers of this fund are listed below. Most of them are delivering similar returns and are having very low volatility.

7. Tax

For tax purpose, this fund is treated like an equity fund as investment asset class is Indian Equity. Long term capital gains will be taxed 10% (if held for more than 1 year) or Short term capital gains will be taxed at 15%.

Please consult your CA for current tax liability and rules since there could be change when you actually invest.

Disclaimer


Before you read conclusion – a disclaimer. Please note – I am not advising you on any financial decisions and you should do your own research and consult your financial advisor before making any financial decision. Please treat article as my personal view only.

10. Conclusion

You can invest in an arbitrage fund if you want tax efficient returns that are better than Liquid Fund. So if there is a need to invest for period like a year or so but you want little more returns than liquid fund, this could be option. Plus returns are tax efficient. So you can consider it as an alternative to one year FD.

You should be aware that returns are low ( 6 – 7 % ) based on existing funds. As technology is getting faster and faster, identifying arbitrage opportunities is getting difficult. So I don’t see any chance of returns being higher in future.

As far as this specific fund – Mirae Asset Arbitrage Fund is concerned, I don’t see any specific advantage it holds over other arbitrage funds in market. So if I would be in your place, I would go with one of proven ones. If you need an arbitrage fund to use for Systematic Transfer Plan to some equity fund of Mirae Asset Mutual fund, you can use it.

You can read full scheme information document here.

You can read other Mutual Fund reviews here.

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