Statistics from AMFI shows that the arbitrage fund has seen a net outflow of Rs 1,423 crore in the month of June. This is the largest outflow from the arbitrage category in this financial year.
There was a total redemption of Rs 5,357 crore this month in the arbitrage fund category, compared to Rs 3,768 crore in May and Rs 3,778 crore in April. In the last couple of months, the category has been losing money but the net inflows have been decent. The net inflow in the category stood at Rs 1,238 crore in April. It came down to Rs 720 crore in May and in June there were net outflows worth Rs 1,423 crore from the category
“There have been outflows from the arbitrage funds since January. There must have been some quarter-end redemptions adding to it this time. In the past three months at least, there has been no voracious inflows happening in this category,” says Lakshmi Iyer, Chief Investment Officer( Debt) & Head Products, Kotak Mutual Fund.
Experts believe that one reason for the outflows is the change in taxation of the arbitrage funds. The finance minister had announced the introduction of 10 per cent tax both on long-term capital gains and on dividends in equity schemes in the Budget 2018. Earlier, the arbitrage funds had an edge over the debt schemes because they were taxed like equity schemes. This meant investments in arbitrage funds over a year qualified for long-term capital gains tax, which was nil at that time
“There is a 10 per cent taxation impacting the category in some way. Earlier, there was no tax. On a base of 6-6.5 per cent, if you are doing 10 per cent taxation, 60-65 bps get knocked out upfront. And in the same period the short-term yields have inched up, so the gap gets plugged quite dramatically. These are the things at play,” says Lakshmi Iyer.
The higher interest rate regime is also impacting the arbitrage category. Experts suggest that the relative arbitrage opportunities tend to reduce when the rates increase. “The interest has been diminishing the arbitrage fund category after the budget, especially from the institutional investors. But now, liquid funds as a category are having higher yield to maturity. This is because of the interest rates going up. Liquid funds are looking more attractive in comparison to arbitrage,” says Vidya Bala, Head of Mutual Fund Research, FundsIndia.