NFO review: LIC MF Arbitrage Fund opens for subscriptionLIC Mutual Fund has launched the new fund offer (NFO) for its latest offering, LIC MF Arbitrage Fund. This rookie fund will take the fund-house’s hybrid product basket to five. The NFO period started on January 4 and will close on January 18. The arbitrage fund aims to make money out of the arbitrage opportunities that potentially exists between cash and derivative market and within the derivative segment of the equity market. Here is RupeeIQ’s take on the offering.

LIC MF Arbitrage Fund: Key details

With the LIC MF Arbitrage Fund, there are as many as 20 such schemes in the category. The biggest fund is this category is the Kotak Equity Arbitrage Fund (AUM of Rs 13,769 crore as of Nov 30, 2018) and the smallest one is the Principal Arbitrage Fund (AUM of Rs 8 crore). Coming to LIC MF Arbitrage Fund, the fund’s investment objective will be to generate income by taking advantage of arbitrage opportunities. These opportunities exist in two places: between cash and derivative market, and within the derivative segment of the equity market.

The LIC MF Arbitrage Fund will also invest in debt securities & money market instruments. Some arbitrage funds keep 30-40% of assets in debt. However, at a net level, their equity allocation is always 65% or above and this allows them to take advantage of equity-fund like taxation.

Investment strategy

The scheme seeks to invest in arbitrage opportunities between spot and futures prices of exchange-traded equities, and the arbitrage opportunities available within the derivative segment.

What if suitable arbitrage opportunities are not available? Then, the scheme may invest in short-term debt and money market securities.

How arbitrage opportunities will be assessed? According to LIC MF, the investment manager will use a disciplined, quantitative analysis while accessing arbitrage opportunities.

Basics

Minimum application amount – The minimum investment in LIC MF Arbitrage Fund is Rs 5,000 & in multiples of Rs 1 thereafter.

Minimum redemption amount – Rs 500 & in multiples of Rs 1 thereafter

Options – Growth & Dividend

Plans – Regular Plan & Direct Plan. (The regular and direct plan will be having a common portfolio but expense ratio will be different)

Load structure – No entry or exit load.

Benchmark index – Nifty 50 Arbitrage TRI

Fund Manager – Yogesh Patil (Equity) and Marzban Irani (Debt)

Peers returns – Arbitrage funds have given 5.3-6.7% returns over the last one year. Principal Arbitrage Fund has given negative returns in this period. In the last three month period, arbitrage funds have given between 1.1-1.7% return.

RupeeIQ take – Arbitrage funds take advantage of the price differential between the cash markets/spot markets on one hand and derivatives/futures markets on the other. During volatile times, there are more arbitrage opportunities. Since 2019 is expected to be a volatile year thanks to Lok Sabha elections etc., opportunities could be more. The arbitrage opportunities arising out of substantial volatility at such times could bring lower-risk returns to the investors.

Many investors look at arbitrage funds as an alternative to other short-term investments like liquid funds. This is due to similar return profiles for both categories but arbitrage funds have equity-fund like taxation edge. Investors, with at least a medium-term investment horizon and comfortable with investing a completely new fund, can consider LIC MF Arbitrage Fund. This fund, if it stays true to its mandate, could bring capital appreciation with moderately low-risk appetite.

Disclaimer – Please note that investors are requested to consult their financial, tax and other advisors before taking any investment decision.

Author
Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on contact@rupeeiq.com