Standard Chartered Mutual Fund has launched Standard Chartered Arbitrage Fund (SCAF), an open-ended equity scheme that plans to take advantage of the differential pricing between the cash and the future markets and in the bargain make some risk free profit.
Experts believe that it is a good option for conservative investors who wish to improve their portfolio returns without changing their risk profile. However, there are some concerns:
Lack of arbitrage opportunities
Investment expert Sandeep Shanbhag feels that while the idea of profiting from the differential pricing between the cash and the future markets seems good on paper, the main problem remains lack of such arbitrage opportunities. Without abundant opportunities, the returns of such funds suffer, he added.
However, Rajiv Anand, head (investments), Standard Chartered Mutual Fund believes that the arbitrage potential available in the market is a function of:
- Interest rates / money market rates, and
- Underlying equity market sentiment
As the equity market sentiment improves, the arbitrage opportunities available in the market increases and vice-versa, he added.
Expenses weigh heavy
Experts feel that the transaction cost and fund management charges in this scheme are likely to impact its returns. Shanbhag said, "The four legs of each transaction (buy in cash, sell in futures, selling in cash and buying in futures) entail transaction costs.
"Coupled with fund management fees and administration costs, such funds would be hard pressed to beat the risk free rate of 8 per cent p.a. that is otherwise available on RBI Bonds or FDs".
Anand differs as he says, "Transaction costs are part of the entire arbitrage trade. The biggest component of the transaction cost is STT (Securities Transaction Tax) and is applicable to all segments of the market."
Meanwhile, he highlights that the key advantage of investing in Arbitrage funds is that it is an "equity" fund as per tax laws and hence dividend distribution tax is zero and long term capital gains is also zero.
"If you compare this with a fixed deposit for example where you are paying full tax as per the investor's slab, these funds effectively strip out the interest component from the equity market through market neutral trades and at the same time give you the tax benefits of equity funds. Hence the benefit relative to other fixed income instruments can be significant", he added.
StanChart's arbitrage fund v/s existing arbitrage funds
Investment advisor Hemant Rustagi feels, "There are some existing open-ended schemes that have similar investment objectives and strategies and have done well. There may not be a great advantage for investors investing in this scheme compared to the existing ones."
However, Anand clarifies that, "Not all of the existing funds carry the concessional tax status of an equity fund. Those that have the concessional tax status do not provide any day liquidity that is available under this fund."
Conclusion:
Experts believe that Standard Chartered Arbitrage Fund is a good option for conservative investors who are looking to improve returns on their portfolio without changing their risk profile. Besides, the scheme is tax efficient, as an investor in this scheme will enjoy the tax benefits that are available for investing in equity funds.
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