Mahindra Manulife Arbitrage Yojana Fund NFO – Should you invest?

Mahindra Manulife Arbitrage Fund NFO Review

Mahindra Manulife Arbitrage Yojana Fund NFO Review


Mahindra Manulife MF has come up with an arbitrage fund that would open for subscription from August 12, 2020. Arbitrage Funds aim to provide income over the short term by investing predominantly in arbitrage opportunities in the cash and derivative segments. While there are liquid funds and overnight funds to park surplus funds and also invest for short term, some of the experts believe that, investing in arbitrage funds is better than those funds. What are the issue details of the Mahindra Manulife Arbitrage Fund? Should you invest in the Mahindra Manulife Arbitrage Fund or avoid?

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Issue details of Mahindra Manulife Arbitrage Yojana Fund (NFO)

This is an open-ended mutual fund equity scheme.

This scheme would open for subscription on August 12, 2020.

This scheme would close for subscription on August 19, 2020.

Since this is an open ended scheme, it would again open for subscription after 5 business days from the date of allotment of Mf units after the NFO period.

This scheme is available in both regular and direct plans.

This plan offers both growth option and dividend option.

This scheme is available for lump sum and SIP investment.

Minimum investment is Rs 1,000 and in multiples of Rs 1 there-off for lump sum investments.

Minimum investment is Rs 500 per month for monthly SIP and for a tenure of 6 months.

The NAV of the NFO is Rs 10 per unit now during initial subscription.

There is no entry load to invest in this mutual fund scheme.

There is an exit load of 0.25% if the mutual fund units are redeemed within 30 days from the date of allotment.

This scheme is classified as MODERATELY LOW risk scheme.

Scheme total expense ratio (TER) is estimated at a maximum of 2.25%, however it would reduce based on the increase in the AUM.

Download Mahindra Manulife Arbitrage Fund SID

How do Arbitrage Mutual Funds work?

Here are a couple of examples which would help to understand this better.

1) Stock price difference between the stock exchanges

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Let’s say the Infosys share price is trading at Rs 1,000 per share on NSE and at Rs  1,010 per share on BSE. If the fund manager of an arbitrage fund spots this opportunity, then they buy shares from NSE and simultaneously sells them on the NSE. This allows him to make a profit of Rs 10 per share (minus transaction + carrying costs) without any risks.

2) Stock Price difference between the cash and futures markets

Let’s say that the same Infy share trades at Rs 1,000 in the cash market and Rs 1,005 in the futures market. The fund manager of the arbitrage fund buys shares from the cash market and creates a futures contract to sell the shares at Rs 1,005.  At the end of the contract expiry time, they sell the stocks in the futures market and books a profit of Rs. 5 per share (minus transaction + carrying costs) without taking any risks.

The above are only a few examples and there are several other ways where arbitrage opportunities can be found.

You can check below short video which help you know Arbitrage funds in simple terms. Source: Edelweiss Mutual Funds.

What is the investment objective of Mahindra Manulife Arbitrage Fund NFO?

The investment objective of the Scheme is to 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.

There is no assurance or guarantee that the investment objective of the scheme will be realized.

Who can invest in this mutual fund scheme?

The following can invest in this scheme.

1) Resident adult individuals, either singly or jointly.

2) Minors through Parents/Lawful Guardian.

3) Hindu Undivided Family (HUF) through its Karta.

4) Partnership Firms in the name of any one of the partners.

5) Proprietorship in the name of the sole proprietor.

6) Companies, Body Corporate, Societies, Association of Persons, Body of Individuals, Clubs and Public Sector Undertakings registered in India if authorized and permitted to invest under applicable laws and regulations.

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7) Banks

8) Non resident Indians (NRIs).

Complete list of eligible participants who can invest can be checked in prospectus of this new fund offer.

Who is the Fund Manager of Mahindra Manulife Arbitrage Fund NFO?

The Fund Managers are:

1) Mr. Srinivasan Ramamurthy (Equity) and

2) Mr. Rahul Pal (Debt).

What is the benchmark for this scheme?

The benchmark for this scheme is NIFTY 50 Arbitrage Index TRI.

What is the allocation pattern in this mutual fund scheme?

This fund investment pattern is as follows:

1) It invests 65% to 100% in equity and equity linked Instruments including equity derivatives. The risk profile in this segment is medium to high.

2) It would invest 0% to 35% in debt securities and money market Instruments (including Triparty repo and reverse repo). The risk profile in this segment is low to medium.

3) It would invest 0% to 10% in units issued by REITs and InvITs. The risk profile in this segment is medium to high.

Why to invest in the Mahindra Manulife Arbitrage Fund?

Here are a few reasons to invest in such funds.

1) Arbitrage mutual funds are low volatility in returns.

2) There is no equity exposure risk as fund manager is buying in one market and selling in another market and making profits.

3) Returns of Arbitrage funds are tax efficient. They are treated like in equity funds, i.e. STCG at 15% and LTCG at 10% without indexation. Hence, these provide better post tax returns.

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Some key risk factors you should consider before you invest in such funds

One should consider some of these risk factors / negative factors before investing.

1) Extreme conditions in Indian equity markets can cause temporary disruptions. A sharp market correction, like it happened in March-2020 (due to the Covid-19 crisis) resulted in stock futures trading at a discount rather than a premium to their spot price which has cut the returns of arbitrage funds.

2) Since the spot and futures positions of arbitrage funds are market-to-market, there are situations where NAV falls. One needs to hold for 3-6 months to get good returns from such funds.

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3) In case of a large redemption in such arbitrage funds, the scheme may need to reverse the spot-futures transaction before the date of futures’ settlement. This eventuality may lead to the basis risk.

4) Investors need to read KIM / SID for complete risk factors of investing in such schemes.

How is the Performance of existing Arbitrage Funds in India?

Now, let us look at some of the top performing arbitrage funds in India. Most of the arbitrage funds gave 4.5% to 5.2%% returns in the last 1 year pre-tax (covid also has impacted with low arbitrage opportunities).

Performance of Arbitrage Mutual Funds till Aug 2020

Should you invest in the Mahindra Manulife Arbitrage Yojana Fund NFO?

Mahindra Manulife Arbitrage Fund invests based on arbitrage opportunities. While in general, such funds can provide better returns than liquid funds or overnight funds, Arbitrate funds have under performed in the last 6 months. If you are low risk to moderate risk investor and want to park your funds for a short term of 6 month period, then you can consider investing in such funds. Alternatively you can invest in some of the top performing liquid mutual funds which was always been favorite investment option for investors who want to park surplus money.

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Suresh KP

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