Risk-averse investors re-deploy funds in arbitrage MF schemes in April

Aversion to debt products has contributed to renewed interest in the category

Arbitrage schemes are back on investors’ radar, with the category garnering net inflows of Rs 6,587 crore in April. Investors have been looking for alternatives to debt schemes, following Fanklin’s winding up of six of its credit-oriented debt schemes.

“In March, the category had outflows due to temporary dislocation between cash and futures markets and investors taking out money for their year-end liquidity needs. But with markets stabilising, investors are looking at the category as an alternative to park funds in and avoid categories with credit or other debt market-related risks,” said Radhika Gupta, chief executive officer at Edelweiss Mutual Fund (MF).

The arbitrage category had net outflows of Rs 33,767 crore in March, as heightened volatility caused stock prices in futures market to trade at discount to spot prices.

As a result, the spreads for such schemes shrunk, impacting the returns.

“While risk-aversion towards debt schemes due to impending downgrade risks is a primary reason for arbitrage flows, easing of negative spreads has given comfort to investors looking to park their money,” said Vidya Bala, co-founder of primeinvestor.in.

Arbitrage funds buy stocks in cash markets and sell in futures markets, where stocks tend to trade at a premium.

With markets stabilising, the spreads have improved for such schemes.

Some advisors say investors should maintain certain caution when looking at arbitrage schemes. “Investors need to be wary as we saw volatility in markets in March impacting returns in arbitrage schemes. The schemes are suitable for investors looking to park funds for six to 12-month period,” said Rushabh Desai, a Mumbai-based MF distributor.

Arbitrage schemes have seen sizeable investor flows in last financial year as investors sought pockets of safety with credit risks taking a toll on debt schemes. From beginning of last fiscal, investor assets in arbitrage schemes have risen 71 per cent -- from Rs 50,839 crore to over Rs 87,000 crore.

“Technically, one cannot make losses in arbitrage schemes, except only to the extent of the fund’s expense ratios in the worst-case scenario. This is because all the positions are balanced-out in such fund,” said Jimmy Patel, managing director and chief executive officer of Quantum MF.