Last Updated on December 29, 2021 at 5:39 pm
Those who argue that the stock market recovery is not to be trusted can use the Nifty 50 Arbitrage Index for support. The index that tracks the price difference between “buying equities and selling equivalent equity futures” has registered a fall over the last three months (13 weeks to be exact). Pointing to a drying up of arbitrage opportunities. As a result, arbitrage mutual fund returns have gone down. What investors need to know.
Announcement: A new seminar is available: How to construct a long-term investment portfolio – a guide for beginners. You can sign up via this form. This is meant for absolute newbies to start investing in the right way, asking the right questions and not make the mistake of choosing products in the very first step and repent later!
Arbitrage mutual fund profit from the price difference between the spot market and the futures market. This gap, known as a spread, is usually positive (future price > spot price) but can become negative in bear markets. It occurred after the 2008 crash and now after the 2020 crash.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
When this happens, mutual funds tend to stop fresh inflows. It occurred in July 2009 and briefly in March-April 2020 (ICICI, Tata AMCs). This is a temporary phenomenon that can last over a few months or more. Naturally, this would affect the sequence of returns over the coming months. The Nifty arbitrage index has recovered over the last month (see table below).
The reduction in arbitrage spread can be seen below in the price movement of Kotak Arbitrage Fund and Nifty 50 Arbitrage Index. The reason why arbitrage mutual funds have not suffered as much is because of their bond holding (up to 35%).
Typically they hold short-term bonds, but their returns have also come down in the recent months. See: Overnight Mutual Funds also have risks! What investors need to know
The trailing returns of ICIC Equity Arbitrage, Kotak Equity Arbitrage and Nifty 50 Arbitrage Index is shown below. Arbitrage funds have been saved by the bond holding from negative returns over the last few months (their weekly returns did go negative)
| Duration | ICICI Pru Equity-Arbitrage Fund(G)-Direct Plan | Kotak Equity Arbitrage Fund(G)-Direct Plan | Nifty 50 Arbitrage Index |
| 1 Week | 0.21 | 0.20 | 0.19 |
| 2 Week | 0.20 | 0.20 | 0.20 |
| 3 Week | 0.15 | 0.12 | 0.08 |
| 1 Month | 0.33 | 0.27 | 0.02 |
| 2 Months | 0.39 | 0.45 | -0.23 |
| 3 Months | 0.96 | 0.99 | -0.33 |
| 10 Week | 0.60 | 0.64 | -0.12 |
| 11 Week | 0.62 | 0.67 | -0.20 |
| 12 Week | 0.83 | 0.79 | -0.25 |
| 4 Months | 2.10 | 1.86 | 0.60 |
| 13 Week | 0.96 | 0.99 | -0.33 |
| 14 Week | 1.36 | 1.39 | 0.13 |
| 6 Months | 2.66 | 2.65 | 0.89 |
| 9 Months | 4.10 | 4.09 | 2.14 |
| 1 Year | 5.64 | 5.67 | 3.72 |
What does this mean? What should investors do? Arbitrage funds should not be used for the short-term. While the losses would not be significant, the mismatch between reality and expectation can be hard to take. Use them for needs above one year.
The lack of participation in the futures market is the reason for this downturn. This happens when there is a financial crisis. It should become better in the coming months. Returns for investors who have been invested for the past few years is likely to dip a little. So better to expect less.
I use ICICI equity arbitrage as part of my emergency fund as in the debt part of my son’s future portfolio (separate folios). The emergency cash (with one withdrawal) has grown at 6.5% over the last four-plus years. I rebalanced out from equity into the arbitrage fund for my son’s future in Dec 2017 and Dec 2019. That now stands at 6.3%. Going forward this should drop a bit, but I am not going to do anything.
We can expect outflows from Arbitrage funds (outflows were reported in March 2020) and reduced inflows in the coming months. This should compensate for the lack/reduced spread. Those who understand risks and use arbitrage funds for the right reason need not be worried (that goes for any investment, duh!)
Let us hope mutual funds are not tempted to take on credit risk to hold on to investors! Better to keep an eye on monthly factsheets for bond quality.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)