Arbitrage schemes back on investors' radar after Franklin Templeton fiasco

The arbitrage category witnessed Rs 33,767 crore in net outflow during March
Arbitrage schemes are back on investors’ radar, with the category seeing Rs 6,587 crore of net inflows in April. This is because investors are looking for alternatives to debt schemes, in which investor sentiment has weakened following Franklin’s wind-up move.

“In March, the category had witnessed outflows on account of a temporary dislocation between the cash and futures markets, coupled with investors taking out money for their year-end liquidity needs. However, with markets stabilising, investors are looking at the category to park funds and avoid instruments with credit or other debt market-related risks,” said Radhika Gupta, CEO of Edelweiss MF.

The arbitrage category witnessed Rs 33,767 crore in net outflow during March, as heightened volatility in the markets caused share prices in the futures market to trade at a discount to spot cash market prices.

As a result, the spreads for such schemes shrunk, which had an impact on returns.


“While risk-aversion towards debt schemes due to impending downgrade risks is a primary reason for arbitrage flows, the easing of negative spreads has given comfort to investors looking to park their money,” said Vidya Bala, co-founder of

Arbitrage funds buy stocks in cash markets and sell in futures markets, where stocks tend to trade at a premium. With markets stabilising, the spreads have improved.

Some advisors say investors should maintain caution when looking at arbitrage schemes. 

“Investors need to be wary as we saw huge volatility in the markets during March, which impacted returns in arbitrage schemes. The schemes are suitable for investors looking to park funds for 6-12 months,” said Rushabh Desai, a distributor.

Arbitrage schemes have seen sizeable investor flows in the last financial year, as investors sought pockets of safety with credit risks taking a toll on debt schemes.

Since the beginning of last financial year, investor assets in arbitrage schemes have risen 71 per cent — from Rs 50,839 crore to over Rs 87,000 crore.

“Technically, one cannot make losses in arbitrage schemes, except only to the extent of the fund’s expense ratio — in the worst-case scenario. This is because all positions are balanced-out in such funds,” said Jimmy Patel, MD and CEO of Quantum MF.

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