Besides the above tax arbitrage, this asset class should draw investors’ attention on pure merit of the asset class and scheme specifics. Kotak Arbitrage scheme (exit load of 0.5% if exit made within 90 days from date of investment) which was recommended by me in the past has managed to generate between 7.50% to 8% p.a. for past 3-6 months. Besides this since February this year (when I first re iterated my investment call) it has paid monthly dividend of approx. 0.68% average, which translates to almost 8% dividend payout over one year.

Returns as on last Thursday of the settlement date (i.e. when an investor should redeem) from the dates of my recommendations:

Returns till date: July 25’2011 from the dates of my recommendations:

Dividends declared since my first recommendation in February 2011:

With an investment horizon of 6 months plus, I would recommend investment in this asset class.

For some strange reasons, investors are still ignoring this asset class (as is evident from the total AUM of all these schemes of all MFs put together at approx. Rs.500 Crs) which is capable of giving much higher post tax returns v/s any other debt schemes with as much safety of principal as liquid/liquid plus schemes (if redemptions made on last Thursday of every month on F & O settlement dates).

Month of May gave slightly lower than expected arbitrage opportunities at close to 60/65 bps. However, current month has given almost 70/75 bps of arbitrage opportunities, translating the same into 7.50% post tax returns opportunity to the investors. Due to very low demand from the industry, very little funds are chasing arbitrage opportunities & hence only on demand/supply situation favouring these schemes, one can expect that there will be good opportunities in future as well.

Another reason is the positive momentum in the equity markets over last few sessions which give rise to better arbitrage opportunities. India has been an under performer in global equity markets & hence, valuations have also started becoming attractive- one more reason for better arbitrage opportunities when FIIs start to buy Indian equities. However, this positive momentum will have intermittent volatility & corrections. This augurs well for this asset class as the Fund Manager can unwind already captured arbitrage opportunities earlier; thereby enhancing overall returns in the scheme.

From a high of 9.50-9.70% returns in 3 month FMPs; returns in these schemes have come down currently on pre tax basis to almost 8.60-8.70% for 3 months. Compare this with 7-7.50% post tax returns in the arbitrage schemes & figures and opportunity of earning better returns will become clearer.

Even on consistency of dividend payouts, this asset class in general has done well as is evident from dividend track record of following schemes:

Comparative of Arbitrage Schemes (as on 30^th June 2011)

In such a scenario, one scheme which can still be considered based on both merit of the asset class as well huge tax arbitrage is ARBITRAGE SCHEMES. They will still continue to generate 6-7% returns on post tax basis as there is no DDT payable & short term gains tax would be at 15% & long term at zero tax.

Even track record of this asset class over various MFs shows that this asset class has been very regular on their monthly/quarterly dividend payouts. Kotak Equity Arbitrage scheme is one such scheme with excellent dividend track record of 6-7% dividend payouts every year:

Hence, in rising interest rate, high inflation, low liquidity scenario coupled with equity markets remaining range bound with intermittent volatility; this asset class can be a good hedge in the corporate portfolios. For more details on this asset class kindly read my note dated February 8’2011 & all other notes on my blog: www.msjcapital.com

Returns as on April 19’2011:

I would recommend investment in this asset class with 6-12 month investment horizon.

In today’s volatile and upward interest rate bias regime, various asset classes in debt markets had started becoming extremely volatile with no clue as to when the interest rates would peak off. Though we have given calls of investments in some of the short term income funds (based on reasons mentioned in my last week’s notes); one more asset class which can make a re-entry into the corporate portfolios is ARBITRAGE Schemes.

Current correction in the markets , as per market participants is a temporary correction in an otherwise bull market phase. In the last 30 years, markets have corrected by approx 10% in the month of January on almost 26 times. These deep corrections have been accompanied by good returns in subsequent 3 months when markets have been in bull phase.The average subsequent 3 month returns have been 10% with 80% win ratio.

Currently we are in similar situation wherein there is volatility in an otherwise bull market phase. Reasons for investing in the arbitrage schemes:

• Since December onwards Fund Managers are able to lock in close to 70-85 bps in arbitrage opportunities
• NSE has brought back almost 30-40 stocks back in the Futures segment; thereby increasing the scope of identifying arbitrage opportunities on enhanced number of stocks
• Markets are in a bullish mode with constant volatility; giving opportunities to Fund Managers to capture higher spreads & also give opportunities to unwind position in between a month; thereby enhancing returns potential
• Arbitrage schemes are as risk free as liquid schemes (refer to my various blog notes under the category of arbitrage Scheme on www.msjcapital.com) if exits made only on the settlement dates. In between a month exits can give rise to negative returns based on market movements. As you all are aware, there is negative co relation between SENSEX movements & NAVs of the arbitrage schemes i.e. NAVs of these schemes go down when markets are up & vice versa
• Most important from an investor point of view is that though these schemes are as risk free as Liquid schemes, the tax implication both on dividend payouts and short term & long term capital gains tax is that of equity schemes. Hence, with no DDT & long term gains tax at zero, this gives rise to an immense higher post tax returns potential
• With an investment horizon of 6-12 months, one should expect 6-8% post tax returns from these schemes (which in the current market scenario is much higher than any other debt schemes)

I would recommend investment in Kotak Equity Arbitrage Fund whose other scheme attributes are as follows:

• Corpus                                                   Rs.140 crs (approx)
• Entry/Exit                                               Any day with no loads attached
• Recommended Entry                           On dates when markets are up
• Recommended Exits                             Only on settlement dates i.e. Last Thursday

Every month

• Current Returns as on                         February 07’2011:

One,three & six month rolling returns since inception: (assuming investments made one day prior to the settlement date and redeemed on the settlement dates i.e. last Thursday every month):

Dividend track record since inception:

I would recommend investment in this scheme with 6-12 month investment horizon to earn decent post tax returns.

While buying cash & selling futures, the said scheme has got additional benefit of receiving dividend on the stocks bought. These dividends will accrue to the scheme in the current month which will add on to the returns on over & above the locked in arbitrage returns of close to 70 bps.This will benefit both existing investors as well as new investors who would invest in the current month. Various Companies who have declared dividend & are in the portfolio of Religare Arbitrage Scheme, have their Record Dates falling due in the current month of June.

It is a very actively managed scheme; wherein the Fund Manager is churning the portfolio regularly by locking in arbitrage opportunities & consistently unwinding the same ( as & when opportunity arises); thereby enhancing overall portfolio returns. The said scheme also has uninterrupted quarterly dividend track record since September 2007 ( Inception date of the scheme: April 2007).

Other scheme details of RELIGARE ARBITRAGE FUND:

The said scheme currently has corpus of Rs.176 Crs.

DIVIDEND HISTORY:

Date Declared Dividend Per unit
26-Sep-07      0.30
18-Dec-07      0.15
18-Mar-08     0.20
20-Jun-08      0.15
15-Sep-08      0.20
15-Dec-08      0.20
12-Mar-09      0.15

LOAD STRUCTURE:
For Investment of = Rs. 50 Lakhs:
Entry Load : NIL;
Exit Load : 0.25% (if redeemed / switched out on or before 25 days from the date of allotment); NIL (If redeemed after 25 days from the date of allotment).

Investment date: Any Business day

Redemption date: Last Thursday of the month coinciding with the date of expiration of F & O Settlement date

We strongly advise our clients to invest in the abovementioned scheme with 3-6 month investment horizon in the current month itself ( on days when Sensex is up & NAVs are down)

Most other schemes in arbitrage space should also be in a similar situation of receiving dividend on their cash stocks in the month of June. Hence it makes sense to take an investment call in this asset class sooner than later in this current month.