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Mahindra Manulife Arbitrage Yojana: Aiming to Tap Arbitrage Strategies
Aug 19, 2020

After a tumultuous 2019, this year began on a positive note; but the equity market has crashed since the pandemic... the profit lines of most businesses are affected and global economies have suffered. As unpredictable as this crisis is, the end of COVID19 pandemic wave could be on the horizon. In the present troubled environment, there are prevailing arbitrage opportunities that can be tapped if you invest in arbitrage funds.

[Read: Why Arbitrage Funds can be a Worthwhile Bet amidst the COVID-19 Pandemic]

An arbitrage fund is a sub-category of Hybrid fund that seeks opportunities from the differential pricing in two different segments (spot and futures or cash and derivatives) of the equity market. Such opportunities are seen in volatile market conditions.

Typically, an arbitrage fund is less risky than the pure equity fund because participants are not speculating on market movements. Instead, they bet on the mispricing of a share/asset that has happened between two related markets. It is seen that the mispricing of security is far more frequent in high volatility months than in low volatility months.

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The Mahindra Manulife Mutual Fund launched Mahindra Manulife Arbitrage Yojana (MMAY), an open-ended arbitrage scheme investing in arbitrage opportunities. The scheme will follow an arbitrage strategy and invest at least 65% of its total assets in equity & equity related instruments as per the mandate under normal and defensive conditions; it will hedge its assets.

Hence in terms of risk-return potential, MMAY is moderately low and suitable for investors who have a moderately low risk-appetite and seeking income through investment in fully hedged equity investments (arbitrage opportunities) and fixed income instruments.

Table 1: Details of Mahindra Manulife Arbitrage Yojana

TypeAn open-ended scheme investing in arbitrage opportunitiesCategoryArbitrage fund
Investment ObjectiveTo generate income by predominantly investing in arbitrage opportunities in the cash and derivatives segment of the equity market and the arbitrage opportunities available within the derivative segment and by investing the balance in debt and money market instruments.
However, there can be no assurance that the investment objective of the Scheme will be achieved.
Min. InvestmentRs 1,000 and in multiples of Re 1 thereafterFace ValueRs 10 per unit
Plans
  • Direct
  • Regular

Options
  • Growth*
  • Dividend (Reinvestment* and Pay out)
*Default option
Entry LoadNilExit Load
  • An exit load of 0.25% is payable if Units are redeemed / switched-out on or before completion of 30 days from the date of allotment of Units;
  • Nil - If Units are redeemed / switched-out after completion of 30 days from the date of allotment of Units.
Fund ManagerMr Srinivasan Ramamurthy & Mr Rahul PalBenchmark IndexNifty 50 Arbitrage Index TRI.
Issue Opens:August 12, 2020Issue Closes:August 19, 2020
(Source: Scheme Information Document)

How will the scheme allocate its assets?

Under normal circumstances, the asset allocation pattern shall be as under:

Table 2a: Asset Allocation under normal circumstances
InstrumentsIndicative Allocations
(% of Total Assets)
Risk Profile
MinimumMaximum
Equity & Equity related instruments including Equity Derivatives*65100%Medium to High
Debt and Money Market Securities (including TREPS (Tri-Party Repo), Reverse Repo)035%Low to Medium
Units issued by REITs & InvITs035%Medium to High
(Source: Scheme Information Document)

If the arbitrage opportunities in the market are not available / negligible, or returns are lower than alternative investment opportunities as per the allocation pattern, then the Fund Manager may choose to follow an alternate asset allocation, keeping the interest of the unitholders at fore. In such defensive circumstances, the asset allocation of the Scheme will be as per the below table:

Table 2b: Asset Allocation under defensive circumstances
InstrumentsIndicative Allocations
(% of Total Assets)
Risk Profile
MinimumMaximum
Equity & Equity related instruments including Equity Derivatives*065%Medium to High
Debt and Money Market Securities (including TREPS (Tri-Party Repo), Reverse Repo).35%100%Low to Medium
Units issued by REITs & InvITs010%Medium to High

* The Scheme will use derivatives (including index futures, stock futures, index options and stock options) as part of the arbitrage strategy of the Scheme and subject to guidelines issued by SEBI from time to time. The exposure to derivatives shown in the above asset allocation table shall be a hedged exposure taken against the underlying equity investments i.e. in case the Scheme shall have a long position in a security and a corresponding short position in the same security in a different segment, then the exposure for the purpose of asset allocation will be counted only for the long position, in terms of the SEBI Circular No. Cir/ IMD/ DF/ 11 / 2010 dated August 18, 2010.

(Source: Scheme Information Document)

BREAKING: Here's Investment of the Decade

What will the Investment Strategy be?

The primary objective of the Mahindra Manulife Arbitrage Yojana is to invest in arbitrage opportunities between spot and futures prices of exchange traded equities and the arbitrage opportunities available within the derivative segment. If suitable arbitrage opportunities are unavailable in the opinion of the fund managers, the Scheme may invest in short-term debt and money market securities.

The fund managers will evaluate the difference between the price of a stock in the futures market and in the spot market. If the price of a stock in the futures market is higher than in the spot market, after adjusting for costs and taxes, the scheme shall buy the stock in the spot market and sell the same stock in equal quantity in the futures market, simultaneously.

The Scheme will endeavour to build similar market neutral positions that offer an arbitrage potential; for e.g., buying the basket of index constituents in the cash or futures segment and selling the index futures, etc. The Scheme would also look to avail of opportunities between one futures contract and another.

As arbitrage opportunities are dependent on ensuing market conditions, there will be a part of the portfolio, which will be invested in debt securities and money market securities. This component of the portfolio will provide the necessary liquidity to meet redemption needs and other liquidity requirements of the Scheme.

Given below derivative and arbitrage strategies the Scheme may adopt is not exhaustive. The Scheme could use similar strategies and any other strategies as available in the markets.

Derivative & Arbitrage Strategies: Derivatives are financial contracts of pre-determined fixed duration, whose values are derived from the value of an underlying primary financial instrument, index, such as interest rates, exchange rates, and equities.

The Scheme will invest in arbitrage opportunities between spot and futures prices of exchange traded equities. The Scheme may build similar hedge positions that offer an arbitrage potential;

The Scheme will also invest in low risk derivatives strategies. These strategies will involve any combination of cash, futures, and options. The Scheme will invest in arbitrage opportunities between spot and futures prices of exchange traded equities.

The Scheme may build similar hedge positions that offer an arbitrage potential.

Who will manage Mahindra Manulife Arbitrage Yojana?

The Mahindra Manulife Arbitrage Yojana will be co-managed; the equity portion will be managed by Mr Srinivasan Ramamurthy; Mr Rahul Pal will manage the fixed portion.

Mr Srinivasan Ramamurthy has done his Electrical Engineering and completed his MBA. He has a wide experience in Fund Management. Before joining Mahindra Manulife Investment Management Pvt. Ltd.in August 2018, he worked as a Fund Manager at IDBI Federal Life Insurance Company Ltd for 6 years, and a Research Analyst at IIFL Securities Ltd, Kim Eng Securities India Pvt. Ltd. at Credit Suisse Securities (India) Pvt. Ltd.

Some of the schemes Mr Srinivas currently manages at the fund house include Mahindra Manulife Multi Cap Badhat Yojana, Mahindra Manulife ELSS Kar Bachat Yojana, Mahindra Manulife Equity Savings Dhan Sanchay Yojana and Mahindra Manulife Hybrid Equity Nivesh Yojana.

Mr Rahul Pal is the Head of Fixed Income at Mahindra Manulife Investment Management Pvt. Ltd since September 2015. Before that he was the of Head Fixed Income, Taurus Asset Management Co. Ltd for 5 years and also worked as a Fund manager of Fixed Income at Sundaram Asset Management Co. Ltd. for 6 years.

Mr Rahul has completed his Commerce graduation with Honors and is an Associate Chartered Accountant.

Currently at the fund house he manages Mahindra Manulife Low Duration Fund, Mahindra Manulife Credit Risk Fund, Mahindra Manulife Liquid Fund, Mahindra Manulife Ultra Short Term Fund, Mahindra Manulife Overnight Fund, Mahindra Manulife Equity Savings Dhan Sanchay Yojana and Mahindra Manulife Hybrid Equity Nivesh Yojana.

The outlook for Mahindra Manulife Arbitrage Yojana

With the use of Arbitrage strategy, the fund managers will actively manage the scheme and it will hedge the risk involved. As mentioned, the Mahindra Manulife Arbitrage Yojana wants to make gains by capturing the arbitrage opportunities ---exchange arbitrage, cash & carry arbitrage, basket of stock arbitrage, and corporate action driven arbitrage.

But identifying and promptly tapping opportunities is tricky and involves a degree of uncertainty. Assurance that fund managers will be able to locate investment opportunities or to correctly exploit price discrepancies in the capital markets cannot be given.

Reduction in mis-pricing opportunities between the cash market and Future and Options market may lead to a lower level of activity affecting the returns. As the Scheme proposes to execute arbitrage transactions in various markets simultaneously, this may result in high portfolio turnover and, consequently, high transaction cost.

Hence, the performance of the Mahindra Manulife Arbitrage Yojana depends on the swift effective versatile construction of the portfolio using the arbitrage strategy.

Thus, as an investor, before you invest in any arbitrage fund, you ought to recognise that arbitrage opportunities might not always work out. Since there's a 10% Long Term Capital Gains Tax (LTCG) on arbitrage funds for gains above Rs 1 lakh in a financial year, arbitrage funds have become unattractive for big-ticket investments.

[Read: How LTCG Tax On Equity Investments Can Derail Your Financial Plan]

Advisably, before investing consider your investment objective, time horizon, and risk appetite.

PS: The last few years have not been among the best for equity mutual funds. While most funds have underperformed or are struggling to match the returns of the benchmark, there are few funds that have the potential to constantly generate alpha for its investors. We have identified five such high alpha generating funds, in our latest report 'The Alpha Funds Report 2020'. Click here to get access to the report.

Author: Aditi Murkute

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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