NFO Pick – (Quant Arbitrage Fund)

25 Mar 2025 , 11:50 AM

WHAT IS QUANT ARBITRAGE FUND ALL ABOUT?

Arbitrage is simultaneous buying and selling of an asset in different markets to take advantage of different prices of the same asset. By buying in underpriced market and selling in the overpriced market, riskless arbitrage profit is locked in. Here the focus is on cash futures arbitrage. In a cash futures arbitrage, the arbitrage is normally identified based on automated algos and even execution is algo-driven as it has to be done quickly. For realizing profits, the arbitrage position is either fully unwound or the cash position is retained while the short futures position is rolled to the next contract. Arbitrage opportunities arise due to change in macros, pricing inefficiencies, market sentiments, and news flows.

TYPES OF ARBITRAGE OPPORTUNITIES

Broadly, there are 5 types of arbitrage opportunities that the arbitrage fund tries to capitalize on.

• Regular cash futures arbitrage to lock-in the assured spread, betting on convergence.
• Reverse arbitrage where trader bets on futures going into discount or bouncing back.
• Index arbitrage where a basket of stocks is matched by short index (Nifty) futures.
• Merger arbitrage, where gaps in merger pricing are leveraged via stock arbitrage
• Convertibles arbitrage, when there is inefficiency against convertible price.

Let us turn to how the arbitrage funds have performed in India.

HOW ARBITRAGE FUNDS PERFORMED IN INDIA?

Here we have considered arbitrage funds with a minimum history of 5 years, and have ranked Direct Plans on 1-year returns. Here are the top-10 arbitrage funds in India.

Scheme Name	1-Year (%) Returns	3-Year (%) Returns	5-Year (%) Returns
Kotak Equity Arbitrage Fund	8.06	7.44	6.24
Bandhan Arbitrage Fund	8.01	7.26	6.03
Edelweiss Arbitrage Fund	8.00	7.38	6.25
Invesco India Arbitrage Fund	8.00	7.60	6.29
Tata Arbitrage Fund	7.99	7.31	6.26
ABSL Arbitrage Fund	7.94	7.24	6.07
UTI Arbitrage Fund	7.92	7.16	6.05
HDFC Arbitrage Fund	7.91	7.17	5.90
HDFC Arbitrage Fund	7.91	7.17	5.90
ICICI Pru Equity Arbitrage Fund	7.90	7.21	6.06
Data Source: AMFI

What one can figure out from the ranking of top-10 arbitrage funds in India is that the top performers on 1-year returns have also done consistently well over 3 years and 5 years. More importantly, the standard deviation in performance is fairly low, so the fund selection risk is also relatively low. That advantage gets magnified vis-à-vis a liquid funds; once the treatment of arbitrage funds as equity fund for tax purposes is also considered.

GLANCE AT THE QUANT ARBITRAGE FUND NFO

Here are key details of the Quant Arbitrage Fund NFO.

• The NFO opened on March 18, 2025 and closes on April 01, 2025. The allotment date for units will be April 04, 2025 and the fund will open for subscription on April 07, 2025.
• On the risk-o-meter, Quant Arbitrage Fund is classified as “Low Risk Fund,” being a fund that predominantly locks in risk-free spreads between cash and futures market.
• Investment objective is to park money into equity cash-futures arbitrage opportunities, so as to generate income over the short to medium term. Fund performance will be benchmarked to the Nifty 50 Arbitrage TRI.
• There is no entry load. Being an index fund, there will be conditional exit load of 0.25% if the fund is redeemed before completion of 1-month from date of allotment.
• Quant Arbitrage Fund offers Regular and Direct plans. Additionally, the fund also offers the Growth option and the IDCW option to investors. Sameer Kate, Yug Tibrewal, and Sanjeev Sharma will be the designated fund managers.
• Minimum application amount in NFO will be ₹5,000 and in multiples of ₹1. Additional purchases and SIPs will have to be in minimum of ₹1,000.
• While the objective is to generate risk-free arbitrage through cash-futures spreads, there is no guarantee of returns. These are subject to market fluctuations.
• Quant Arbitrage Fund, is classified as a pure equity fund. STCG tax (less than 1 year), will be taxed at 20.8% (including surcharge). LTCG tax (1 year or more), will be taxed at 12.5%, after maximum annual exemption of ₹1.25 Lakhs per annum.

The Quant Arbitrage Fund mirrors the risk profile of a liquid fund, but offers higher returns as well as greater tax efficiency, compared to liquid funds.