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Arbitrage funds have recorded net inflows for three months straight, after steep outflows for half a year before that. The trend changed as mutual fund (MF) schemes improved amid a rise in equity market volatility, a report by Business Standard stated.
As per the report, investors redeemed over ₹31,000 crore from arbitrage schemes between June and November before putting in ₹3,000 crore in the last three months.
Arbitrage funds are low-risk equity products with returns often comparable to liquid funds in the debt MF space. These schemes run fully-hedged equity positions and generate returns from the differential in the prices of stock futures and the underlying stock, informed BS.
It further added that the performance of arbitrage schemes is dependent on the price spread of equities in the cash market and the futures market. These spreads have improved in recent months leading to better returns, according to fund managers.
Quoting data from Value Research, the report observed that most arbitrage schemes have shown significant improvement in performance recently. For example, the average monthly returns of hybrid schemes was 0.6 percent in the last three months compared to around 0.4 percent in the previous six months.
It further pointed out that Arbitrage fund managers have gained from higher volatility in the equity market in recent months.
"Arbitrage funds tend to do well during periods of heightened volatility. It is because arbitrage opportunities go up during such phases in the market," Viral Bhatt, founder of Money Mantra told BS.
Arbitrage fund returns are in line with the money market rates. "They tend to track money market rates. And with interest rates moving up, arbitrage funds have also started to do better," said Dhaval Kapadia, director, portfolio specialist, Morningstar Investment Adviser India.
The returns are slightly higher than that of liquid funds, giving arbitrage schemes a dual advantage over their debt counterpart, noted the report, adding that these funds enjoy an upper hand over their debt counterpart on the taxation front since they are taxed as equity funds.