concept of arbitrage - tata mutual fund
TRANSCRIPT
What's Arbitrage?
The simultaneous buying and selling of securities, currency, or commodities in different
markets or in derivative forms in order to take advantage of differing prices for the same
asset. This is considered risk-free profit for the investor/trader.
Pair of gloves is priced at Rs. 10 in market A
Pair of gloves is priced at Rs. 15 in market B
Example of Arbitrage
2
INDIAN ARBITRAGE FUNDS
An arbitrage fund - a type of equity mutual fund – captures the mispricing
between the cash/spot markets and derivatives/ futures markets on the
other
taking an offsetting position in the underlying market
Usually, the position is held till the expiry of the futures contract when the
mean reversion happens i.e., when the offsetting positions converge, thus
realising the locked in profit or/and the position is rolled to next series
The arbitrage activity is a risk free strategy and makes sense when it yields
better returns as compared to other similar risk free instruments (post tax)
3
ABC Ltd.
ARBITRAGE
Difference captured is 8 INR i.e. ~8.4% annualised
The 8 INR captured will be realised at the expiry day or before if the futures start trading at discount to the spot.*
*Refer slide no. 18 for full risk disclosures
This trade is protected against any market
movement as the Long position is completely hedged with the Short
position.
4
ARBITRAGE OPPORTUNITY – PRICE EXAMPLE
Early unwinding allows reutilising the same money either into Debt markets or reinitiating of
Arbitrage position, thus enhancing returns.
Date Cash Futures Spread
ARBITRAGE EXAMPLE: ENHANCED RETURN- EARLY UNWINDING
Returns are enhanced as we unwind early and Reinvest either Debt or Equity - Thus
benefits of Reinvesting.
1030
1080
1130
1180
1230
1280
Futures Options
Index Futures
One can create “Buy/Sell” position on Indices (Nifty, BankNifty & IT Index) using Futures. There are 3 months Futures available at any point in time.
Index Options
One can create “Buy/Sell” position on Indices (Nifty, BankNifty & IT Index) using Options. There are various strikes available and can be used subject to the risk profile. In addition, Nifty has options ranging till next 5 years while BankNifty has weekly options.
Stock Futures
One can create “Buy/Sell” position on Individual Stocks using Futures.
Stock Options
One can create “Buy/Sell” position on stocks using Options. There are various strikes available and can be used subject to the risk profile.
THERE ARE 6 INDICES & 204 STOCKS IN THE DERIVATIVE SEGMENT
8
Indian Derivatives Mkt-Contracts
Stk Opt (Cont) Total (Cont)
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1800000
Indian Derivative Mkts-Values
Stock Options Total
Source: NSE 9
Global Derivatives- NSE is ranked No 2
in the world1
the world2
world3
in the world4
1. Source: FIA rankings based on number of contracts traded or cleared between Jan 17 -Dec 17 2. Source: WFE https://members.world-exchanges.org/index.php/statistics/monthly-reports-tool- Index Fut 3. Source: WFE https://members.world-exchanges.org/index.php/statistics/monthly-reports-tool- Index Options 4. Source: IOMA 2018 Derivatives Report - 2017 Calendar Year- Single Stock Futures
ARBITRAGE FUNDS VS OPEN INTEREST - A SNAPSHOT ON SATURATION
Open interest is the total number of outstanding contracts that are held by market participants at the end of each day. Open interest measures the total level of activity into the derivatives market
Current Single Stock Futures cumulative Open Interest stands at 1087 bn
The total derivative market is growing at 23% CAGR over last 10 years
General Anti-Avoidance Rule (GAAR)* ensures tax free investment in derivatives for the FII’s, hence a significant long can be created, subject to the market condition thus ensuring a smooth short roll position in addition to the longs created by the retails
Arbitrage Fund OI is 35% of the markets OI (one sided), leaves enough room now and going ahead as market expands
Data as on: 30th Nov, 2018. Source: NSE &MFI online
*A General Anti-Avoidance Rule (GAAR) is a set of broad and general principles-based rules enacted in the tax code aimed at counteracting avoidance of tax. GAAR (General Anti-Avoidance Rules) is a tool for checking aggressive tax planning especially that transaction or business arrangement which is/are entered into with the objective of avoiding tax.
For example: “A” makes a company XYZ to sell product C. The company B pays 35% tax, but if “A” himself sold the products he would pay 40% tax. “A” has formed the company only to save 5% tax 11
TATA ARBITRAGE FUND
It is an equity oriented mutual fund that invests minimum 65% into equities and balance in debt securities (including units of liquid schemes of Tata Mutual Fund).
The trade is completely hedged right from inception to closure. Which means there is no risk of price movement. A long trade is completely covered with a short trade.*
Even though it qualifies as an Equity product for tax purpose it is intends to be a stable risk free income generator without volatility.
In general, the product is suitable in Bull markets & Volatile markets. A sustained bear market can depress the returns.
* Refer slide no. 18 for full risk disclosures 12
INVESTMENT STRATEGY
Would invest in arbitrage position between Cash & Futures trading on exchanges
It can even invest in basket of stocks and short the corresponding futures against it
Bank FD’s, cash or securities will be used as margin money for the fund.
Debt investment will be in high quality papers
Returns may be enhanced when the investors invest in the fund for a period of 3-6 months minimum to get the benefits of Rollovers
13
ASSET ALLOCATION
$ The exposure to derivative shown in the above asset allocation table is exposure taken against the underlying equity investments i.e. in case the scheme shall have a long position in a security and a corresponding short position in the same security, then the exposure for the purpose of asset allocation will be counted only for the long position. The intent is to avoid double counting of exposure and not to take additional asset allocation with the use of derivative. If suitable arbitrage opportunities are not available in the opinion of the Investment manager, the Scheme may hedge the equity portfolio by using derivatives or may invest in short term debt / money market instruments.
Instruments
Risk Profile
Low
Equity and equity related securities and equity derivatives$ 65 100 High
Debt, Money market instruments and cash (including units of liquid schemes of Tata Mutual Fund) 0 35 Low to Medium
14
WHY TATA ARBITRAGE FUND?
It’s a Low risk strategy; insulates investors from Equity Market Risk
Designed to capture the “INTEREST” element in the Equity Markets
Income focussed & Equity taxation
Ideal investment option for short-medium term investors
An Equity Product aims to generate stable return like Liquid fund without the volatility of the Equity & Debt Product
15
ARBITRAGE FUND - TAX ADVANTAGE
Capital Gain Tax Debt Mutual Funds Equity Mutual Funds Arbitrage Funds
Short Term Income Tax Slab
applicable to assessee (<3 years)
15% (< 1 Year) 15% (< 1 Year)
Long Term 20% with Indexation
(>3 Years) 10% (>1 year) 10% (>1 year)
ARBITRAGE FUNDS OFFER BETTER TAX ADVANTAGE COMPARED TO DEBT FUNDS
Above rates are excluding Surcharge and Cess
16
Scheme Name TATA ARBITRAGE FUND
NFO Dates Opens on 10th December, 2018. Closes on 17th December, 2018
Investment Objective
The investment objective of the Scheme is to seek to generate reasonable returns
by investing predominantly in arbitrage opportunities in the cash and derivatives
segments of the equity markets and by investing balance in debt and money
market instruments.
Type Of Scheme An open ended scheme investing in arbitrage opportunities.
Fund Manager Sailesh Jain
Benchmark Nifty 50 Arbitrage Index
Min. Investment Amount Rs. 5,000/- and in multiple of Re.1/- thereafter
Load Structure Entry Load: Nil; Exit Load: 0.25 % of the applicable NAV, if redeemed/switched
out/withdrawn on or before expiry of 30 Days from the date of allotment.
Plans & Options Regular & Direct Plans with Growth & Monthly Dividend Option (monthly dividend
is not assured and is subject to the availability of the distributable surplus)
17
RISK DISCLOSURES
No assurance can be given that fund manager will be able to locate investment opportunities or to correctly exploit price discrepancies in the capital markets.
Lowering of spreads between the cash market and future and options market may lead to lower returns.
Other risks include risk of mispricing or improper valuation and the inability of the derivative to correlate perfectly with underlying assets, rates and indices, illiquidity risk whereby the Scheme may not be able to sell or purchase derivative/equity quickly enough at a fair price.
18
Toll Free Number : 1800-209-0101 | SMS: TMF to 57575 | www.tatamutualfund.com
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully
RISK FACTOR
The simultaneous buying and selling of securities, currency, or commodities in different
markets or in derivative forms in order to take advantage of differing prices for the same
asset. This is considered risk-free profit for the investor/trader.
Pair of gloves is priced at Rs. 10 in market A
Pair of gloves is priced at Rs. 15 in market B
Example of Arbitrage
2
INDIAN ARBITRAGE FUNDS
An arbitrage fund - a type of equity mutual fund – captures the mispricing
between the cash/spot markets and derivatives/ futures markets on the
other
taking an offsetting position in the underlying market
Usually, the position is held till the expiry of the futures contract when the
mean reversion happens i.e., when the offsetting positions converge, thus
realising the locked in profit or/and the position is rolled to next series
The arbitrage activity is a risk free strategy and makes sense when it yields
better returns as compared to other similar risk free instruments (post tax)
3
ABC Ltd.
ARBITRAGE
Difference captured is 8 INR i.e. ~8.4% annualised
The 8 INR captured will be realised at the expiry day or before if the futures start trading at discount to the spot.*
*Refer slide no. 18 for full risk disclosures
This trade is protected against any market
movement as the Long position is completely hedged with the Short
position.
4
ARBITRAGE OPPORTUNITY – PRICE EXAMPLE
Early unwinding allows reutilising the same money either into Debt markets or reinitiating of
Arbitrage position, thus enhancing returns.
Date Cash Futures Spread
ARBITRAGE EXAMPLE: ENHANCED RETURN- EARLY UNWINDING
Returns are enhanced as we unwind early and Reinvest either Debt or Equity - Thus
benefits of Reinvesting.
1030
1080
1130
1180
1230
1280
Futures Options
Index Futures
One can create “Buy/Sell” position on Indices (Nifty, BankNifty & IT Index) using Futures. There are 3 months Futures available at any point in time.
Index Options
One can create “Buy/Sell” position on Indices (Nifty, BankNifty & IT Index) using Options. There are various strikes available and can be used subject to the risk profile. In addition, Nifty has options ranging till next 5 years while BankNifty has weekly options.
Stock Futures
One can create “Buy/Sell” position on Individual Stocks using Futures.
Stock Options
One can create “Buy/Sell” position on stocks using Options. There are various strikes available and can be used subject to the risk profile.
THERE ARE 6 INDICES & 204 STOCKS IN THE DERIVATIVE SEGMENT
8
Indian Derivatives Mkt-Contracts
Stk Opt (Cont) Total (Cont)
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1800000
Indian Derivative Mkts-Values
Stock Options Total
Source: NSE 9
Global Derivatives- NSE is ranked No 2
in the world1
the world2
world3
in the world4
1. Source: FIA rankings based on number of contracts traded or cleared between Jan 17 -Dec 17 2. Source: WFE https://members.world-exchanges.org/index.php/statistics/monthly-reports-tool- Index Fut 3. Source: WFE https://members.world-exchanges.org/index.php/statistics/monthly-reports-tool- Index Options 4. Source: IOMA 2018 Derivatives Report - 2017 Calendar Year- Single Stock Futures
ARBITRAGE FUNDS VS OPEN INTEREST - A SNAPSHOT ON SATURATION
Open interest is the total number of outstanding contracts that are held by market participants at the end of each day. Open interest measures the total level of activity into the derivatives market
Current Single Stock Futures cumulative Open Interest stands at 1087 bn
The total derivative market is growing at 23% CAGR over last 10 years
General Anti-Avoidance Rule (GAAR)* ensures tax free investment in derivatives for the FII’s, hence a significant long can be created, subject to the market condition thus ensuring a smooth short roll position in addition to the longs created by the retails
Arbitrage Fund OI is 35% of the markets OI (one sided), leaves enough room now and going ahead as market expands
Data as on: 30th Nov, 2018. Source: NSE &MFI online
*A General Anti-Avoidance Rule (GAAR) is a set of broad and general principles-based rules enacted in the tax code aimed at counteracting avoidance of tax. GAAR (General Anti-Avoidance Rules) is a tool for checking aggressive tax planning especially that transaction or business arrangement which is/are entered into with the objective of avoiding tax.
For example: “A” makes a company XYZ to sell product C. The company B pays 35% tax, but if “A” himself sold the products he would pay 40% tax. “A” has formed the company only to save 5% tax 11
TATA ARBITRAGE FUND
It is an equity oriented mutual fund that invests minimum 65% into equities and balance in debt securities (including units of liquid schemes of Tata Mutual Fund).
The trade is completely hedged right from inception to closure. Which means there is no risk of price movement. A long trade is completely covered with a short trade.*
Even though it qualifies as an Equity product for tax purpose it is intends to be a stable risk free income generator without volatility.
In general, the product is suitable in Bull markets & Volatile markets. A sustained bear market can depress the returns.
* Refer slide no. 18 for full risk disclosures 12
INVESTMENT STRATEGY
Would invest in arbitrage position between Cash & Futures trading on exchanges
It can even invest in basket of stocks and short the corresponding futures against it
Bank FD’s, cash or securities will be used as margin money for the fund.
Debt investment will be in high quality papers
Returns may be enhanced when the investors invest in the fund for a period of 3-6 months minimum to get the benefits of Rollovers
13
ASSET ALLOCATION
$ The exposure to derivative shown in the above asset allocation table is exposure taken against the underlying equity investments i.e. in case the scheme shall have a long position in a security and a corresponding short position in the same security, then the exposure for the purpose of asset allocation will be counted only for the long position. The intent is to avoid double counting of exposure and not to take additional asset allocation with the use of derivative. If suitable arbitrage opportunities are not available in the opinion of the Investment manager, the Scheme may hedge the equity portfolio by using derivatives or may invest in short term debt / money market instruments.
Instruments
Risk Profile
Low
Equity and equity related securities and equity derivatives$ 65 100 High
Debt, Money market instruments and cash (including units of liquid schemes of Tata Mutual Fund) 0 35 Low to Medium
14
WHY TATA ARBITRAGE FUND?
It’s a Low risk strategy; insulates investors from Equity Market Risk
Designed to capture the “INTEREST” element in the Equity Markets
Income focussed & Equity taxation
Ideal investment option for short-medium term investors
An Equity Product aims to generate stable return like Liquid fund without the volatility of the Equity & Debt Product
15
ARBITRAGE FUND - TAX ADVANTAGE
Capital Gain Tax Debt Mutual Funds Equity Mutual Funds Arbitrage Funds
Short Term Income Tax Slab
applicable to assessee (<3 years)
15% (< 1 Year) 15% (< 1 Year)
Long Term 20% with Indexation
(>3 Years) 10% (>1 year) 10% (>1 year)
ARBITRAGE FUNDS OFFER BETTER TAX ADVANTAGE COMPARED TO DEBT FUNDS
Above rates are excluding Surcharge and Cess
16
Scheme Name TATA ARBITRAGE FUND
NFO Dates Opens on 10th December, 2018. Closes on 17th December, 2018
Investment Objective
The investment objective of the Scheme is to seek to generate reasonable returns
by investing predominantly in arbitrage opportunities in the cash and derivatives
segments of the equity markets and by investing balance in debt and money
market instruments.
Type Of Scheme An open ended scheme investing in arbitrage opportunities.
Fund Manager Sailesh Jain
Benchmark Nifty 50 Arbitrage Index
Min. Investment Amount Rs. 5,000/- and in multiple of Re.1/- thereafter
Load Structure Entry Load: Nil; Exit Load: 0.25 % of the applicable NAV, if redeemed/switched
out/withdrawn on or before expiry of 30 Days from the date of allotment.
Plans & Options Regular & Direct Plans with Growth & Monthly Dividend Option (monthly dividend
is not assured and is subject to the availability of the distributable surplus)
17
RISK DISCLOSURES
No assurance can be given that fund manager will be able to locate investment opportunities or to correctly exploit price discrepancies in the capital markets.
Lowering of spreads between the cash market and future and options market may lead to lower returns.
Other risks include risk of mispricing or improper valuation and the inability of the derivative to correlate perfectly with underlying assets, rates and indices, illiquidity risk whereby the Scheme may not be able to sell or purchase derivative/equity quickly enough at a fair price.
18
Toll Free Number : 1800-209-0101 | SMS: TMF to 57575 | www.tatamutualfund.com
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully
RISK FACTOR