BOI AXA Arbitrage Fund: Should You Invest?   Jun 07, 2018


An open ended arbitrage fund with an objective to generate income through arbitrage opportunities between cash and derivative segments of equities.

Scheme details of BOI AXA Arbitrage Fund

Scheme Details
Type An open-ended scheme investing in arbitrage opportunities Benchmark Index NIFTY 50 Arbitrage Index
Min. Investment Lump sum:Rs 5000 and in multiples of Rs 1 thereafter

Additional purchase: Rs 1000 and in multiples of Rs 1 thereafter

Min. Investment for Monthly SIP:Rs 100 and in multiples of Rs 100 thereafter

Minimum Investment for Monthly STP: Rs 1000 and in multiples of Rs 100 thereafter

Plans  • Regular
• Direct

Options under each plan
  • Growth
  • Dividend Pay-out
  • Dividend Re-investment* 
*default option
Face Value Rs 10 per unit Expense Ratio Upto 2.50% (including additional expenses)
Entry Load Nil Exit Load i. NIL for redemption/switch out of up to 10% of the units allotted within 30 days of allotment

ii. 0.50% for redemption/switch out of more than 10% of the initial units within 30 days of allotment

iii. NIL after 30 days from the date of allotment of units
Issue Opens May 31, 2018 Issue Closes: June 14, 2018

Investment Objective of BOI AXA Arbitrage Fund*

To generate income through arbitrage opportunities between cash and derivative segments of equities and by deployment of surplus cash in debt securities and money market instruments.

However, there is no assurance or guarantee that the investment objective of the scheme will be realized.

*Source: Scheme Information Document

Is BOI AXA Arbitrage Fund for you?

BOI AXA Arbitrage Fund (BAAF) is an open-ended arbitrage fund mandated to invest upto 65% of its net assets into equity and equity related instruments. The scheme’s investment objective is to generate income through arbitrage opportunities between cash and derivative segments of equities.

The term ‘Arbitrage’ refers to the simultaneously buying and selling of a security in two different markets, with an aim to gain from the price difference. Since, the transactions are in either direction, the positions are completely hedged. Hence, arbitrage transactions are virtually risk-free.

While the risk is low, due to fully hedged positions, you should be aware that arbitrage opportunities do not always exist. The success of arbitrage strategies depends on the markets conditions, risk-free rate of return and the access to low latency trading (which executes trades at faster speeds).  The first two, are beyond the control of the fund manager. Though the risk may be low, the returns may not be consistent.

Hence, if you are a conservative investor, you should strictly avoid such schemes. The suitability of BAAF angled towards investors with a moderate-to-high appetite for risk appetite and a investment horizon of three years or more.

Remember, while a pure arbitrage scheme is ideal for short-term period of 1-3 years, as the risk is low; the same investment horizon may not augur well with enhanced arbitrage funds. Thus, if you are investing for short-term goals, you should avoid taking undue risk of investing in unhedged equity.

Asset Allocation of BOI AXA Arbitrage Fund

The asset allocation under normal circumstances will be as under:

Instruments Indicative allocations
(% of total assets)
Risk Profile

High/Medium/Low

Minimum Maximum
Equity and equity related securities* 65 100 Medium to High
Equity Derivatives* 65 100 Medium To High
Debt & Money market securities/ instruments 0 35 Low

The Asset Allocation Pattern of the Scheme under defensive circumstances^ would be as under:

Instruments Indicative allocations
(% of total assets)
Risk Profile

High/Medium/Low

Minimum Maximum
Equity and equity related securities* 0 35 Medium to High
Equity Derivatives* 0 35 Medium To High
Debt & Money market securities/ instruments 65 100 Low

*The asset allocation to the extent of 65% to 100% in Equity and Equity Derivatives is on account of arbitrage strategy pursued by the fund. The fund will not take unhedged, directional exposure in equity and equity Derivatives.

^Defensive Circumstances- are when in the event of adequate arbitrage opportunities not being available in the equity and derivative markets or are when the arbitrage opportunities in the market are negligible or returns are lower than alternative investment opportunities as per the allocation pattern. The allocation under defensive circumstances will be made keeping in view the interest of the Unit holders. Such deviations shall normally be for a short term purpose only, for defensive considerations and the intention being at all times to protect the interests of Unit Holders. The rebalancing of the portfolio in accordance with the asset allocation pattern indicated above shall be done within a period of 30 days and will be ensured that the portfolio adheres to the investment objective of scheme. In cases where the rebalancing is not carried out within 30 days, the reasons for not carrying out the rebalancing within the aforesaid period will be placed before the Trustees and Investment Committee for its consideration.

Further it is stated in the offer document that:

  • The Scheme will not invest in Foreign Securities and ADRs/GDRs issued by Indian or foreign companies. The Scheme will not invest in Stock Lending and Short Selling.

  • The Scheme will not invest in Securitized Debt, Credit Default Swap or equity linked debentures.

  • The total exposure related to options premium paid will not exceed 20% of the net assets of the Scheme.

  • The Scheme may enter into plain vanilla interest rate swaps for hedging purposes.

(Source: Scheme Information Document)

Investment Strategy Of BOI AXA Arbitrage Fund

For Equity Allocation

Under normal conditions BOI AXA Arbitrage Fund would invest 65% - 100% of its net assets into equity and equity related instruments. And 65% - 100% in equity derivatives.

BAAF will invest predominantly in arbitrage opportunities. The fund manager will evaluate price mismatch of a security between spot price (cash market) and futures market.

If the price of a stock in the futures market is higher than in the cash market, after adjusting for cost and taxes, the scheme shall buy the stock in the spot market and sell the same stock in equal quantity in the futures market simultaneously.

The Fund will endeavour to build similar market neutral positions that offer an arbitrage potential for e.g. buying the basket of index constituents in the cash segment and selling the index futures and selling the corresponding stock future etc. The Scheme would also look to avail of opportunities between futures contracts of different months.

For Debt Allocation

The scheme is also mandated to invest upto 35% of its net assets in debt and money market instruments under normal circumstances.

But under defensive circumstances i.e. when there aren't many arbitrage opportunities available, the fund may invest around 65% - 100% of its net assets into debt and money market securities.

The assets will be invested in privately negotiated debt and money market instruments which include but are not limited to:

  • Government Securities

  • Debt securities

  • Money market instruments such as , treasury bills, commercial papers, reverse-repo agreements, CBLOs (Collateralised Borrowing and Lending Obligation), CDs (Commercial Deposits) of scheduled commercial banks and so on.

  • Repo (Repurchase agreement)- A Repo or Reverse Repo is a transaction in which two parties agree to sell and repurchase the same security

  • Any other instruments as permitted under the Regulations from time to time.

Please note, the scheme will not make investments in foreign securities or Foreign Securitized Debt.

Fund Manager Profile of BOI AXA Arbitrage Fund

The fund will be jointly managed by Mr Ajay Khandelwal.

Mr Ajay Khandelwal has around 10 years of experience in Equity Research. He was recently appointed as an assistant manager for BOI AXA Small & Mid Cap Equity & Debt in December 2017. The co-fund manager for this fund is Mr Alok Singh.

BOI AXA Arbitrage Fund is his first fund to be managed independently.

His qualifications are – MBA and Bachelor of Engineering.

Prior to joining BOI AXA Mutual Fund in 2010, he has been associated with B&K Securities and Infosys.

Fund Outlook of BOI AXA Arbitrage Fund

BAAF will aim to exploit arbitrage opportunities existing in the market. Volatile market conditions create several such opportunities for fund managers.

With domestic and global uncertainty, the market will be dotted with volatility in the months to come.

However, it depends on the capability of the fund management team to identify and convert such mispricing into gains. But, there is no guarantee that there will always be arbitrage opportunities available.

So, the fortune of the fund lies in the fund managers investment style and investment decisions.

From a valuations standpoint, the Indian equity market is cooling off from overheated levels. The trail P/E of S&P BSE Sensex is hovering around 24x – clearly out of the grossly overpriced zone. Coming to the small-cap and mid-cap index, they have moderated to 70x and 34x respectively, the small-cap index remains in the grossly overpriced zone, while mid-caps have cooled off from the highs of nearly 50x.

Despite easing valuations, investors need to adopt a cautious and systematic approach when investing in the equity market at the present juncture.

In an attempt to achieve its investment objective BOI AXA Arbitrage Fund is expected to carry moderate risk.

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