Does the difference between the share prices in different markets worry you? Does it affect your potential to make prudent investments in time?
Rather than letting the difference between markets make a difference to you, you could rather take advantage of it and benefit from the price difference.
Let us understand it better by knowing what Arbitrage is.
Arbitrage is a strategy that takes advantage of the price difference of an asset in various scenarios. In other words, it is the act of buying a security in one market and simultaneously selling it in another market at a higher price, thereby enabling investors to profit from the temporary difference in cost per share. Although this may seem like a complicated transaction to the untrained eye, arbitrage trades are actually quite straightforward and are thus considered low-risk.
The various types of Arbitrage can be summarised as follows:
Exchange Arbitrage; a situation when a stock is available at different prices in different exchanges, one can buy a stock in Exchange A at a price and sell it in Exchange B at a higher price, thus earning a profit.
Cash and Carry Arbitrage; the most commonly used strategy by Arbitrage Funds, one can buy stock of a Company at the spot market price and sell the contract in a Futures market at a premium, thus locking in the profit. The reverse can also be done by buying the Futures option and selling in spot/cash, if the stock is anticipated to be traded at discount in the Futures market.
Basket of Stocks Arbitrage; this involves buying a basket of stocks with the same weightage in a particular index and sell future contracts of the same index, and thus booking the profit.
Corporate Action Driven Arbitrage; this requires adequate market knowledge and timing of corporate action like mergers and acquisitions, rights issue and buy-back and the price of stocks available at a premium or discount due to such action can be captured efficiently.
An Arbitrage strategy hedges risks completely since the profits are locked-in irrespective of the fact whether the price of the stock moves up, remains steady or goes down.
Arbitrage Funds are thus hybrid funds with a minimum of 65% investment in equity and equity related instruments. Thus, these funds are absolutely suitable for investors looking to either benefit from tax efficiencies or those looking for relatively low risks in a short term horizon.
The Investment Strategy of Mahindra Manulife Arbitrage Yojana is to invest in arbitrage positions between cash and futures trading on exchanges, or in a basket of stocks and short the corresponding futures against it and thus derive returns from the implied cost of carry between the underlying and the derivatives market.
Another option kept open by this scheme is to invest in high quality debt papers for income generation, in those times when the arbitrage spread is low.
This scheme offers a benchmark of Nifty Arbitrage Index TRI with no exit load if the units are redeemed or switched out after the completion of 30 days of allotment. The exit load of 0.25% shall be applicable only if the redemption/switch-out is done on or before the completion of 30 days.
The minimum application or additional purchase is for INR 1000 and in multiples of INR 1 thereafter. Minimum switch-in above this threshold is in multiples of INR 0.01 and minimum redemption / switch-out is this threshold amount or 100 units, whichever is lower.
Investors can opt for either Regular or Direct (D) plans, with both Growth (D) and Dividend options available under both plans. In the Dividend option, investors can choose between Dividend Payout and Dividend Reinvestment (D).
The Fund is well managed by a team of professional fund managers, helmed by Srinivas Ramamurthy – Fund Manager (Equity) and Rahul Pal – Head (Fixed Income), both having years of experience in their respective fields with various institutions.
A relatively lower risk due to arbitrage strategy, better tax efficiency compared to short term funds and least volatility among hybrid funds are definitely good enough reasons to invest in this scheme.
Use the price difference between the markets to your favour by investing in Mahindra Manulife Arbitrage Yojana. The new fund offer has opened on August 12, 2020 and closes on August 19, 2020.
And for those who miss the above difference, there’s still scope to rejoice. The scheme reopens for continuous sale and purchase from August 25, 2020.