Volatile market helps boost performance.
Owing to the volatility in the market, November saw arbitrage funds doing much better than the benchmark indices.
While both the indices saw negative returns, these funds provided returns in the range of 0.5-1.2 per cent.
"Arbitrage opportunities were very good last month as the market was very volatile. These funds give risk-free returns even though they invest in equity, as the positions are already held," said Mr Raju Singh, mutual fund analyst with SBI Cap Securities. "Around five months ago, there were few such opportunities for these funds to do well. At one point their returns were even lower than that of liquid funds."
Arbitrage funds perform best in a volatile market. The objective of an arbitrage fund is to provide risk-free returns. Fund managers can hedge their risks by going long in the cash market and short in the futures market.
High returns
November saw a lot of volatility in the market with the Sensex falling by 834 points (-4.05 per cent) and the S&P CNX NIifty by 255 points (-4.17 per cent). The arbitrage funds saw higher returns.
Birla Sun Life Enhanced Arbitrage Fund gave the highest returns at 1.22 per cent, SBI Arbitrage Opportunities Fund was second at 0.98 per cent, followed by Kotak Euity Arbitrage Fund at 0.96 per cent.
Also, these funds do not have very high AUMs. The assets are usually around Rs 100 crore.
"This gives them an advantage as they can then consolidate their portfolios. Having lower AUMs means they can consolidate and diversify their investments," said Mr Hiren Dhakan, Associate Fund Manager, Bonanza Portfolio.
However, analysts said these funds can put up a better performance. "An arbitrage fund can generally provide 7-8 per cent in annualised returns. Therefore, these funds can actually give higher returns than what they are showing right now since the market is moving in a range," said Mr Dhakan.
"Arbitrage funds are the safest options as they always hold hedge positions and toggle between cash and the futures options. In that sense, their risk profile is lower. At no point will these funds perform badly because of their hedge positions, except when the markets are either steadily moving up or moving down," he added.
Source: http://www.thehindubusinessline.com/2010/12/02/stories/2010120251191000.htm
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