Arbitrage funds' NAVs stabilise after closing auction volatility

Aug 3 spike largely reversed in next 3 sessions; movements now back in usual trajectory

The net asset values (NAVs) of arbitrage funds are back on their usual course after sharp swings in the initial days of the new closing auction session (CAS). Arbitrage funds were among the mutual fund categories most affected by the new mechanism that came into force on August 3, as the change in closing-price determination created differences in the valuation of their cash and futures positions. 

Their NAVs rose by about 0.5 per cent on the first day — a move equivalent to around a month’s average return for the category.

  The NAVs, however, corrected over the next three trading sessions, giving back almost the entire gain. Since then, their day-to-day movements have been relatively muted. The trend is also reflected in one-month returns, with arbitrage funds delivering an average return of 0.45 per cent as of August 14, broadly in line with the category’s usual range.

  The sharp swings had made it risky for investors buying into arbitrage funds, as they could end up getting units at an inflated NAV during the period of abnormal movements.

  Distributors had consequently advised investors to wait for the volatility to settle or take a staggered approach. 

  “Arbitrage funds are now seeing their NAVs normalise as the initial impact of the CAS fades. The sharp daily movements were largely a valuation effect arising from changes in execution and hedging dynamics under the new mechanism, rather than a fundamental shift in the underlying arbitrage opportunity,” said Ankur Punj, managing director (MD) & business head, Equirus Wealth.

  “Such disruptions are uncommon in arbitrage funds and are likely to moderate as fund managers and market participants adapt to the new process,” he added.

  “The recent temporary NAV disruption in arbitrage funds, triggered by the new CAS, has fully normalised as markets adapted to the mechanism. Such rare technical glitches do not alter the core DNA of arbitrage strategies, which structurally capture mispricings between cash and derivatives markets with minimal directional risk,” said Anup Bhaiya, founder, Money Honey Wealth Services.

  Bhaiya said arbitrage funds remain an option for investors looking to deploy lump sum money over the short-to-medium term. This can particularly be a relatively low-volatility and tax-efficient alternative to traditional fixed deposits.

 

Arbitrage funds have emerged as a sizeable category, with assets under management (AUM) of around ₹3 trillion.

 

They are primarily used to park surplus or lump sum money for the short term. These funds seek to earn from price differences between the cash and futures markets while maintaining relatively low volatility.

 

With returns generally in the range of 6-8 per cent, even small losses can materially eat into profits. This is because of the large amounts typically invested in the category.