The investment objective of JM Arbitrage Advantage Fund is to generate income through arbitrage opportunities emerging out of mis-pricing between the cash market and the derivatives market and through deployment of surplus cash in fixed income instruments.
The return of the fund is expected to be as per the extent of arbitrage opportunity; no matter what direction and to what extent the market rises or falls. Hence, the benchmark index is the Crisil Liquid Fund Index. Investors should note that this fund will not deliver the high returns that one has been used to from equity funds, but at the same time it is not expected to give negative returns either.
Is JM Arbitrage Advantage same as its earlier JM Equity Derivative Fund?
JM Arbitrage Advantage Fund is quite similar to their earlier JM Equity Derivative Fund launched in February 2005 in that both funds seek to generate market neutral returns. The only difference is that now SEBI regulations allow higher exposure to derivatives than was possible in February 2005.
Investment expert Sandeep Shanbhag feels that instead of launching a new fund, the offer document of the old fund could have been amended to incorporate the amended guidelines.
However, Biren Mehta, Fund Manager of JM Arbitrage Advantage Fund clarifies, "The existing fund is an income scheme and has a large corporate base, who do not have internal approvals to invest in an equity scheme (which the new product is).
"Also going through the entire process of seeking positive consent of all investors and also providing them with an exit window for some period is a tedious process. Thus we wanted to launch a new product. Also wanted to re-iterate the awareness in the market of both the existing fund as well as the new launch as we have a 16-month proven track record with the JM Equity & Derivative Scheme. Now an investor has an option to choose from an income arbitrage product as well as an equity arbitrage product."
Experts believe that for a long-term investor, such a product is an excellent choice as a defensive investment especially in a volatile investment climate.
Advisor Hemant Rustagi feels that JM Arbitrage Advantage is a good investment option for conservative investors, and for equity investors who wish to invest their surplus cash as this fund would yield better returns than floating rate debt funds. Also, due to its equity nature, post tax returns would go higher in this fund as compared to debt funds, he adds.
Lack of arbitrage opportunities - How to tackle?
However, on the flipside, experts feel that lack of arbitrage opportunities in the market is a concern for the fund. Shanbhag says, "In a period where arbitrage opportunities do not exist or are few, the fund would have to depend upon its fixed income investment to deliver return."
But, Mehta clarifies that 'Though in a bearish market the opportunities are on the lower side, but we still get opportunities. Also in lack of opportunities the fund will be invested in an income /debt product and deliver returns of that scheme. JM Arbitrage Advantage fund is classified as an equity fund, thus the investors will enjoy the tax benefits.'
Will the fund always maintain its equity nature?
JM Arbitrage Advantage is also expected to have an annual average of 65 per cent to maintain the equity nature of the schemes. While experts believe that by maintaining a 65 per cent in equity this fund can take tax advantage applicable to equity funds, there needs to be clarification on whether the fund will be forced to take naked positions (un-hedged positions in equity) just to maintain the asset allocation?
"We do not intend to take open equity positions at any point of time," clarifies Patel. "Should there be a period where arbitrage opportunities are scarce or quoting at spreads that yield returns that are even lower than those offered by that of money market funds, we shall for those two days - i.e. the beginning and end of the month, deploy funds in prevailing spreads to fulfill the Income Tax requirements for classification of an equity fund. The fund has to maintain an average of 65 per cent in cash future arbitrage out of 24 days (i.e. the first and last days of the month) in a year," he added.
Liquidity - A concern?
Lastly, it being an interval fund, experts feel that the liquidity in JM Arbitrage Advantage is not as high as in an open-ended fund.
But Patel has an answer to that, "The redemption is once in a month, that is the last Thursday of every month which coincides with the settlement of the futures contract. The cash and the futures prices converge on that day, thus the returns are higher as we realise the spread that we had locked in the beginning of the month.
"During the month the NAV can be volatile and there are chances that day on day return can be negative. If you see our existing fund's payout NAV on every last Thursday, it has never given a negative return month on month. Also, any product you hold till maturity gives the maximum returns."
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