Why should you invest in Bajaj Finserv Arbitrage Fund?

Arbitrage funds have gained popularity for their unique investment strategies and potential for relatively steady returns irrespective of the prevailing market conditions. One such fund that is part of this category is the Bajaj Finserv Arbitrage Fund.
In this article, we will share insights into the Bajaj Finserv Arbitrage Fund and why you should invest in it.

• Table of contents

1. Understanding arbitrage funds
2. Bajaj Finserv Arbitrage Fund
3. Bajaj Finserv Arbitrage Fund Features
4. Why you should invest in Bajaj Finserv Arbitrage Fund?
5. Factors to consider when adding arbitrage funds
6. How to invest in Bajaj Finserv Arbitrage Fund?

Understanding arbitrage funds

Arbitrage funds are a specific category of hybrid mutual funds that aim to capitalise on price differentials between the cash and derivatives segments of the equity markets. They follow a strategy of simultaneously buying and selling securities to profit from market inefficiencies. The key advantage of arbitrage funds is that they have the potential to provide investors with relatively stable returns, regardless of the market situation.

Bajaj Finserv Arbitrage Fund

Scheme type and objective

The Bajaj Finserv Arbitrage Fund is an open-ended scheme investing in arbitrage opportunities. The investment objective of the scheme is to seek to generate returns by investing in arbitrage opportunities in the cash and derivatives segments of the equity markets and by investing balance in debt and money market instruments. However, there is no assurance that the investment objective of the scheme will be achieved.

Brief Scheme asset allocation

Equity and equity-related instruments: The fund allocates a minimum of 65% and a maximum of 100% of its assets to equity and equity-related instruments, including derivatives and stock options. This segment of the fund carries a very high risk.

Debt & money market instruments: The fund allocates a minimum of 0% and a maximum of 35% of its assets to debt and money market instruments. This portion of the fund has a low to moderate risk profile.

In the case of the Bajaj Finserv Arbitrage Fund, the fund manager employs several arbitrage strategies in compliance with SEBI guidelines to capitalise on market inefficiencies:

Cash-future arbitrage: This strategy involves taking advantage of price differences between a stock's price in the cash market and its price in the futures market. For example, if a stock is trading at Rs. 100 in the spot market and Rs. 105 in the futures market, the fund manager may buy the stock in the spot market at Rs. 100 and simultaneously sell it in the futures market at Rs. 105, earning the cost of carry between the stock and its futures.

Rolling over of the futures transaction: In this strategy, the fund manager unwinds the short position in the current month's futures and simultaneously sells futures of the subsequent month while holding onto the spot position. This approach allows the fund to adjust to changing market conditions.

Dividend arbitrage: Before a company declares a dividend, there is often a profitable opportunity in the stock futures/options market. The fund manager can capitalise on this by buying the stock in the spot market and selling it in the futures market, benefiting from the price drop in the stock after it goes ex-dividend.

Buy-back arbitrage: This strategy leverages the price differential between the buy-back price and the traded price when a company announces a buy-back of its own shares. For example, if a company announces a buy-back at Rs. 100 per share while the current market price is Rs. 95, its futures price is likely to be higher in anticipation of the buy-back price. The fund manager can buy the stock at Rs. 95 and sell its futures at, say, Rs. 100, capturing the arbitrage opportunity.

Nifty spot-nifty futures arbitrage: This strategy takes advantage of pricing differences between the Nifty index and Nifty futures. If the Nifty is at 20,000 and the Nifty futures are at 21,050, the fund manager may buy Nifty futures and sell a portfolio comprising index stocks, earning the difference between the two.

Bajaj Finserv Arbitrage Fund Features

The Bajaj Finserv Arbitrage Fund, managed by Bajaj Finserv Asset Management Ltd., is designed to offer investors a blend of investment strategies that aim at capitalizing on arbitrage opportunities, thereby creating a potential for returns.

Arbitrage funds have a lower risk profile compared to pure equity investments. The arbitrage process involves simultaneous buying and selling of an asset to profit from the price difference in different markets.

Let’s take a closer look at the distinct features of the Bajaj Finserv Arbitrage Fund:

(Please refer the Scheme Information Document for detailed asset allocation)

This allocation strategy is designed to avoid double counting of exposure, and the allocation is rebalanced in line with market conditions.

• Market-neutral positioning: By investing in both the cash and derivatives segments, the Bajaj Finserv Arbitrage Fund maintains a market-neutral stance, attempting to profit from the differential pricing of securities in these diverse markets without taking on significant directional market risk.
• Dynamic asset allocation: The fund dynamically allocates assets between equity and equity-related instruments (including derivatives and stock options), and debt and money market instruments, thereby balancing the risk-reward ratio.
  • Equity and related instruments (including derivatives): 65% to 100%
  • Debt and Money Market instruments: 0% to 35%
  • Non-convertible preference shares: 0% to 10%
• Focus on relative stability and liquidity: With a portion of the fund's assets invested in debt and money market instruments, the investment goal emphasizes on relative stability and liquidity. This approach also helps to manage the fund's cash requirements effectively, seeking to provide a cushion against market volatility.
• Diversified arbitrage strategies: The Bajaj Finserv Arbitrage Fund employs a range of arbitrage strategies, such as cash-future arbitrage and dividend arbitrage, to exploit the pricing inefficiencies across markets. The diversification of strategies aims to enhance the potential for returns while also minimizing risk.
• Compliance and transparency: In line with SEBI guidelines, the fund does not engage in speculative practices like short selling in the cash market. The fund's operations are transparent, with clear disclosures about its investment strategies and asset allocation.
• Tailored for conservative investors: The Bajaj Finserv Arbitrage Fund can be suitable for conservative investors who seek to benefit from the equity markets without taking on the associated risks. It is carefully designed for those who prefer a cautious approach but are also keen on a strategy that goes beyond the traditional debt instruments.

This fund is also suited for investors looking for lower risk options with a potential for consistent returns and those who want to take advantage of market mispricing without significant exposure to the equity market.

Why you should invest in Bajaj Finserv Arbitrage Fund?

Here are some reasons to consider investing in the Bajaj Finserv Arbitrage Fund

Risk mitigation: The fund’s strategies are designed to capitalise on arbitrage opportunities, thereby minimising risk.

Diversification: With a mix of equities, debt, and money market instruments, it provides a diversified portfolio.

Expert fund management: The expertise of Bajaj Finserv Asset Management Ltd. in picking the right arbitrage opportunities can be a valuable asset.

Factors to consider when adding arbitrage funds

While adding an arbitrage fund to your portfolio, it is important to assess your risk appetite and investment horizon. Other factors to consider are tax implications, expense ratio of the fund, and the fund manager's expertise. These funds are suitable for investors seeking short-term, low-risk investment options.

How to invest in Bajaj Finserv Arbitrage Fund

Investing in the Bajaj Finserv Arbitrage Fund involves a few steps. Here's a general guide:

• Know your KYC (Know Your Customer) status: KYC is a mandatory process for all investors in India. If you are not KYC validated, you will need to complete the KYC process before investing. You can complete KYC online or offline through a SEBI-registered intermediary.
• Choose an investment platform: You can invest in the Bajaj Finserv Arbitrage Fund through various platforms, including:
• Directly through Bajaj Finserv AMC: You can visit the Bajaj Finserv Asset Management Company's (AMC) website or their branch office to invest directly.
• Through online platforms: Several online platforms and mobile apps allow you to invest in mutual funds.
• Through a mutual fund distributor: A distributor can guide you through the investment process and help you choose a fund based on your financial goals and risk tolerance.
• Select the fund and investment option: Choose between a lumpsum investment or a Systematic Investment Plan (SIP).
• Make the investment: Once you have chosen the fund and investment option, you can make the payment through your bank account.

FAQs:

What is Bajaj Finserv Arbitrage Fund?

The Bajaj Finserv Arbitrage Fund is an open-ended mutual fund that aims to generate returns by investing in arbitrage opportunities in the equity markets, including the cash and derivatives segments, and by allocating a portion of its assets to debt and money market instruments.

What is the asset allocation strategy of Bajaj Finserv Arbitrage Fund?

The Bajaj Finserv Arbitrage Fund follows a specific asset allocation strategy to manage risk and achieve its investment objectives. It allocates the maximum portion of its assets to equity and equity-related instruments, including derivatives, followed by debt and money market instruments.

What is the investment objective of the Bajaj Finserv Arbitrage Fund?

The investment objective of the Scheme is to seek to generate returns by investing in arbitrage opportunities in the cash and derivatives segments of the equity markets and by investing balance in debt and money market instruments. However, there is no assurance that the investment objective of the Scheme will be achieved.

Which type of investor should consider the Bajaj Finserv Arbitrage Fund?

The fund is ideal for investors seeking to invest in low to moderate risk opportunities and those interested in market-neutral strategies.

What are the benefits of investing in an arbitrage fund?

Arbitrage funds offer the potential for low-risk returns and are less affected by market volatility compared to pure equity funds.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.