Ride the short-term volatility with arbitrage funds

Arbitrage category of funds are witnessing renewed interest from investors on account of higher market volatility. Investors use arbitrage fund to park their short-term surplus aiming capital appreciation with minimal risk, periodic income and tax arbitrage. The fully hedged equity portfolio looks out for better arbitrage opportunities and keeps risk of any directional equity calls away.

UTI Arbitrage Fund is one among the early generation of arbitrage funds which was launched in 2006 and now has a 13-year track record spanning across different market cycles. The fund has exhibited decent performance besides paying monthly dividend under its regular and direct plans . The fund has delivered average return of 6.51% (rolling returns) on 6 months daily basis under its regular-growth option (data period: August 2014 to August 2019). During the same period the fund has generated return in the range of 4.95% (Min) to 9.37% ( maximum) on 6 months daily rolling basis without any instances of negative returns . On compounded annual growth basis, the fund has delivered in excess of 6.15% under its regular plan and 6.70 % plus return in direct plan on 1/3/5  year basis. (data as of August 2019)

The fund being equity oriented enjoys certain tax arbitrage (in respect of capital gains tax and dividend distribution) compared to other debt investment avenues. The fund has a reasonable track record of monthly dividend distribution. The periodic income in the form of dividend can help investors plan out their finances in a holistic manner. The NAV appreciation in addition to this adds to overall return.

In the current market environment where there is higher risk aversion on account of credit issue & market volatility, arbitrage funds can provide a relatively safer investment avenue for short term parking of funds. The fully hedged equity portfolio takes the worry off for the investor and targets higher yield from arbitrage opportunities. On debt side, the fund manager focuses on quality debt instruments (such as AAA , A1+) with low duration of 175-200 days.

UTI Arbitrage Fund can be a good investment option given its track record. Notably, the fund has grown up significantly in size i.e.  from an AUM of 1170 Crs in August 2018 to 2400 crores as on 5th September 2019.