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WF : Why have you decided to launch an Arbitrage Fund, given the rather small size of this product category?
Seemant : There are 2 primary reasons for us to launch the Arbitrage Fund now.
First, it is a category, with all its benefits, has been grossly under served. We believe it is a tax efficient proxy to Liquid Plus or Ultra Short Term investments. It is also labeled as 'BLUE' - indicating lowest amount of risk among all the Mutual Fund offerings.
Secondly, Edelweiss Group is known for its expertise in the field of Arbitrage. Hence it was only logical and timely for us, to launch this fund at a time with immense positivity in sentiment. For investors with a medium to long term investment horizon and also for investors who are risk averse, this Fund offers an immense potential. Arbitrage opportunities exist in all market conditions, helping investors generate returns irrespective of the direction in which the index moves. With its equity orientation, the dividends are tax free and the capital gains are treated with STCG or LTCG , if the units are held for more than one year, are tax free too, making it more tax efficient than Liquid and Debt Schemes.
WF : What in your opinion is coming in the way of this category becoming much larger?
Seemant : I think the biggest reason has been lack of awareness among investors. If you see the benefits these funds offer over Liquid/Liquid Plus /Ultra Short term funds, there is no reason why this category should be so small. We believe it is just a matter of time, before the investors realize the benefits of these funds and the category grows manifold. As category, in last few months, HNIs have started looking this as right and optimum substitute and we hope with increased awareness, Retail money will also flow into this category.
WF : How large is the volume of arbitrage business conducted in the market and what percentage goes through the MF industry?
Seemant : Currently, about 5-7% of daily turnover in the F&O segment are related to Arbitrage trades. If you were to look at the current size of the Industry, it is circa Rs. 5,000 Crore.
WF : Some advisors argue that arbitrage is largely a bull market phenomenon and that in bearish phases or in dull phases, it becomes very difficult to find arbitrage opportunities. Is this therefore only a seasonal product?
Seemant : We have analyzed the data of Arbitrage Funds since 2007 and split it further in periods where either Nifty has moved significantly upwards or significantly downwards. What we found out was that the base case returns delivered by Arbitrage funds has been closer to 8% and the highest returns has been closer to 11% - proving that these funds can deliver stable and consistent returns across market cycles. Also, if you were to look at the category since 2007, when the markets have seen multiple cycles, there have been just 3-4 months in 2008, when there were no significant arbitrage opportunities. We think the category will only grow from hereon - both in the primary market as well as for the MF industry.
WF : What kind of arbitrage opportunities will you be looking for? Is it mainly the cash - futures arbitrage or are there other opportunities as well?
Seemant : Edelweiss Arbitrage Fund will primarily invest in cash-futures arbitrage opportunities. We will also seek to tactically invest in 'dividend' arbitrage opportunities.
WF : How are you positioning your arbitrage product in an investor's portfolio?
Seemant : Edelweiss Arbitrage Fund is for Investors seeking:
To generate income by investing In arbitrage opportunities available in the equity markets
To earn higher post tax returns compared to Debt and Money Market funds
Arbitrage Funds being equity oriented schemes:
Dividends are not subject to DDT
Short Term Capital Gains is taxed at flat 15% * as compared to applicable income tax rate for Individuals / Corporates in case of Debt and
Long Term Capital Gains Tax is 'NIL' as compared to 22.66% (with indexation benefit) or 11.33% (without indexation benefit) for Debt and Money Market Schemes
To invest with medium to long-term investment horizon
It is a great investment option to lend stability to your portfolio in all market conditions.
* Plus applicable Surcharge
Disclaimer: Scheme classification and objective: Edelweiss Arbitrage Fund (An Open-ended Equity Scheme) Investment Objective: The investment objective of the Scheme is to generate income by predominantly investing in arbitrage opportunities in the cash and the derivative segments of the equity markets and the arbitrage opportunities available within the derivative segment and by investing the balance in debt and money market instruments. However, there is no assurance that the investment objective of the Scheme will be realized and the Scheme does not assure or guarantee any returns. Asset Allocation Pattern: Equity and equity related instruments including derivatives: 65% to 100% of the net assets; Debt and money market instruments including margin money deployed in derivative: 0% to 35% of the net assets. The Scheme will not invest in securitized debt, Foreign Securities, ADRs/GDRs issued by Indian or foreign companies or in Stock Lending and Short Selling. Terms of the Issue: Units of Rs. 10/- per unit for cash during the NFO period and at applicable NAV based prices on re-opening. NAVs will be calculated and published on all Business Days. Plans/Options: The Scheme offers two Plans - Regular and Direct Plan. Each Plan will have three options, Growth, Dividend & Bonus. Dividend Option offers Dividend Reinvestment, Payout and Sweep Facilities. Minimum Application Amount: Rs.5,000/- and in multiples of Re. 1/- thereafter. Minimum Redemption Amount: Re.1/- or any number of Units. Load Structure: Entry Load: Nil; Exit Load: If redeemed on or before 3 months from date of allotment: 0.50%; If redeemed after 3 months from the date of allotment: Nil. New Fund Offer (NFO) expenses: NFO expenses shall be borne by the AMC. Scheme Recurring Expenses: Subject to a percentage limit of average daily net assets prescribed under SEBI Regulations, expenses over and above the prescribed ceiling will be borne by the AMC.
Risk Factors: All Mutual Fund and securities investments are subject to market risk and there can be no assurance that the Scheme's objective will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on the factors and forces affecting the capital markets. Past performance of the Sponsor and their Affiliates/AMC/Mutual Fund & its Scheme(s) does not indicate the future performance of the Scheme and may not necessarily provide a basis of comparison with other investments. Investment in Mutual Fund Units involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including the possible loss of principal and uncertainty of dividend distribution. As the price / value / interest rates of the securities in which the Scheme invest fluctuate, the value of your investment in the Scheme may go up or down. Edelweiss Arbitrage Fund is only the name of the Scheme and does not in any manner indicates either the quality of the Scheme or its future prospects and returns. The Sponsor is not responsible or liable for any loss resulting from the operation of the Schemes beyond the initial contribution of Rs. 1,00,000/- made by it towards setting up Edelweiss Mutual Fund. Investors are not being offered any guaranteed /assured returns under any Scheme of Edelweiss Mutual Fund.
Statutory Details: Edelweiss Mutual Fund is set up as a Trust under the Indian Trusts Act, 1882 by Edelweiss Financial Services Limited. Sponsor: Edelweiss Financial Services Limited (EFSL) [liability restricted to initial contribution of Rs. 1,00,000]. Trustee: Edelweiss Trusteeship Company Limited (ETCL), a Company registered under the Companies Act, 1956. Investment Manager: Edelweiss Asset Management Limited (EAML), a Company registered under the Companies Act, 1956. Copy of Statement of Additional Information (SAI) / Scheme Information Document (SID) and Key Information Memorandum (KIM) can be obtained from any of our Investor Services Centers as well as from our website www.edelweissmf.com.
Mutual fund investments are subject to market risks, read all scheme related documents carefully.
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