Amfi to introduce new category for arbitrage funds

The Association of Mutual Funds in India (Amfi) plans a separate category for depicting inflow into arbitrage funds, currently part of the equity category. Monthly flows for equity schemes are currently shown under the heads of ‘equity’ and ‘equity-linked saving schemes’.

The decision is aimed at improving transparency. By sector estimates, the assets of arbitrage funds are Rs 30,000 crore. “We are trying to give out as much specific information as possible. Volatility in arbitrage funds can influence overall equity inflow, which is why we are considering a separate category,” said C V R Rajendran, chief executive of Amfi.

Manoj Nagpal, CEO, Outlook Asia Capital feels giving out the numbers separately will be a good move as inflow into arbitrage funds is mostly short-term in nature and could give an incorrect picture of overall inflow into equity schemes.

The new category is expected to be introduced as part of the monthly inflow shown for October.

Arbitrage funds exploit the price difference of an asset between two or more market segments, such as cash and futures. These have the risk profile of a debt fund but get taxed as an equity fund, making it attractive for short-term investors. These funds work well in volatile markets, as fund managers capitalise on the price differential between the cash and futures markets.

Arbitrage schemes have given one-year average category returns of 6.7 per cent, says Value Research. These came into the limelight after JM Financial’s scheme collected in excess of Rs 5,000 crore in July 2014, reportedly dangling the tax carrot provided by what is known in sector parlance as bonus stripping.

This term refers to the practice of buying units with the purpose of participating in a bonus issue, booking losses on the original value invested and then setting it off against gains from other sources. Observers believe the practice has stopped, after Amfi issued a best-practices circular last year, asking fund houses to stop accepting subscriptions for bonus plans.

Mutual funds continued to see positive inflow into equity schemes during September, a net Rs 3,743 crore. During August, these were Rs 6,103 crore. The benchmark Sensex had slid a little more than two per cent in September.