Arbitrage Funds suffered significant declines when the market crashed due to the COVID-19 pandemic (the coronavirus of the winter and spring of 2020) and have now temporarily shut down. Some Arbitrage Funds were forced to temporarily close due to the pandemic, including Tata Mutual Fund, ICICI Prudential Mutual Fund, Equity Savings, and Balanced Advantage.
In the year prior to March 2020, Arbitrage Funds saw an average return of 5.92%. However, around mid-March 2020, the average return fell to 0.09%, according to LiveMint.
On March 19, 2020, Tata Mutual Fund closed its arbitrage funds. The fund reopened a week later on March 26, 2020 for new subscriptions, additional subscription, switch-in into the scheme, new Systematic Investment Plan (SIP) registrations, and Systematic Transfer Plan (STP) registrations, according to Economic Times. Rahul Singh, CIO-equities, Tata Mutual Fund issued a statement informing investors that, “The arbitrage spreads are back to reasonable levels. That is, equity futures are trading at a premium to the spot prices. In fact, the spreads are at 4-5%, almost around the peak spread levels. To protect the interest of the existing and new investors, we had stopped fresh inflows in the fund last week… But now the trend has effectively reversed towards a positive direction and we have reopened the fund for fresh subscriptions.”
ICICI Prudential Mutual Fund closed new inflows between March 21 and March 31, 2020. ICICI Prudential Mutual Fund informed investors that the funds contracted due to increased selling and it expects below-average returns. While “spreads” are typically .3-.4%, they dropped to .15-.20%, and many securities have futures trading at a deep discount. ICICI Prudential Mutual Fund directed its investors who had a horizon of less than 3 months due to the Ultra Short, Savings, and Money Market Funds and increased the yields by .4-.8% across the different maturities of bonds.
Equity Savings Funds are those that invest in debt, equity, and arbitrage, at a minimum of 65% (including arbitrage position), as well as a minimum of 10% in debt. The Arbitrage Funds help to protect the downside risk of these investments. Equity Savings Funds are typically appealing to conservative investors who want exposure to equities but fear market volatility.
Balanced Advantage are managed equity funds that alter their equity allocation from 30-80%, depending on price-earning ratios and market valuations.
Arbitrage Funds are a type of mutual fund that provides debt-like returns. Arbitrage Funds appeal to investors who are seeking to take on a minimal risk while profiting from volatile markets; however, the payoff can be unpredictable. Arbitrage Funds are a popular investment for individuals with a high-net worth who are seeking a minimal risk.
Typically, Arbitrage Funds exploit the price difference between assets that should, in theory, have the same price. Arbitrage Funds make money by holding stocks and selling futures, where the gap between the two (also known as the spread), gives the fund its return.
Arbitrage Funds purchase stocks in a cash market and sell that interest in the futures market, at the same time. The difference between the stock prices and futures contracts are typically small, and thus Arbitrage Funds usually place a large number of trades to see any significant gains. Additionally, the and expense ratios tend to be high due to the high number of trades needed to be successful and profitable.
For tax purposes, they are treated the same as equity funds.
Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, brokerage firms across the country may be liable for investment or other losses suffered by its customers.
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