While most of the benchmark indices — Nifty 100 TRI, Nifty Midcap 100 TRI and S&P BSE 500 TRI — were unable to keep their heads above water in the volatile conditions over the past one year, arbitrage TRI managed to clock a positive return of 6.14 per cent.

Arbitrage funds, which are considered equity-oriented funds as far as taxation is concerned, followed suit and delivered 5.8 per cent in the same period .

The funds under the arbitrage fund category are appealing to investors who want to profit from volatile markets without taking too much risk. These schemes generate income mostly from hedged positions using derivatives and, therefore, the risks and returns are low, as in liquid funds. Given their hedging strategies, these funds are not impacted by daily stock market volatility.

Although they limit losses, they don’t assure great returns. The schemes invest in debt securities or money market instruments when there is no opportunity available to hedge the positions.

It is worth noting that given the recent turmoil, the spread turned 10-30 basis points negative after many stock futures traded at a deep discount due to intense selling by foreign portfolio investors.

This led to volatility in the returns of the arbitrage funds. Also, these funds witnessed huge outflows in March as the dividend plan turned unattractive due to the tweak in taxation. The dividend declared is now taxed as per the marginal tax rate of the investor.

Institutions and HNIs who had benefited from the earlier tax structure pulled out money from these funds.

Nifty 50 Arbitrage TRI has delivered 5.3 per cent and 5.6 per cent gains over the past three- and five-year periods, respectively. The funds in these periods have delivered similar returns. In the long-term, over the past 10 years, the Nifty 50 Arbitrage TRI has gained 6.6 per cent, while the category average is 7.2 per cent.

Nippon India Arbitrage, Edelweiss Arbitrage and Kotak Equity Arbitrage have been the top three funds over the past three- and five-year periods and have delivered returns of 6.2-6.4 per cent in both the time-frames. These funds hold 50-70 per cent of their assets in cash. Baring Nippon India Arbitrage, which has about 7 per cent exposure to equity, the other two funds have only debt exposure.

JM Arbitrage and Principal Arbitrage have been the underperformers in the past three years, delivering returns of 5.2 per cent and 2.7 per cent, respectively.

Some of the top-performing funds over the past one year that have delivered returns of 6.3-6.55 per cent are: Edelweiss Arbitrage, BNP Paribas Arbitrage, Tata Arbitrage and L&T Arbitrage Opportunities.

JM Arbitrage, BOI AXA Arbitrage, Principal Arbitrage and Essel Arbitrage have given returns in the 3.3-4.8 per cent band.

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