hdfc arbitrage fund an income generating equity investment · e.g. assume stock price of abc ltd....
TRANSCRIPT
October 2019
1
HDFC Arbitrage Fund(An open ended scheme investing in arbitrage opportunities)
This product is suitable for investors who are seeking*
• Income over short term.• Income through arbitrage opportunities between cash and derivative
market and arbitrage opportunities within the derivative segment
*Investors should consult their financial advisers if in doubt about whetherthe product is suitable for them.
An Income Generating Equity Investment
Arbitrage – The Concept
The arbitrage concept works off on mispricing of assets across differentmarkets due to the underlying inefficiencies in market pricing.
The illustration alongside gives a general idea of how the arbitrage fund takesadvantage of such mis-pricing.
All positions are completely hedged and hence the strategy mitigates the riskassociated with market volatility.
E.g. Assume stock price of ABC Ltd. is at Rs.190/‐ in the cash market. This stock is also traded in the derivatives segment, where its future price is Rs.197/‐In such a case, one can make a risk‐free profit by selling a futures contract of ABC Ltd. at Rs. 197/‐ and simultaneously buy an equivalent number of shares in the equitymarket at Rs 190/-.On settlement day, it wouldn’t matter which direction the stock price has taken in the interim. Because on the expiry day (settlement date) the price of equity shares andtheir futures tend to converge. (Also refer illustration on slide 3)
HDFC Mutual Fund/AMC is not guaranteeing returns on investments made in this scheme. The example ignores all transaction related costs. 2
Capturing The Difference between Future & Spot
3
The above simulation is for illustrative purposes only and should not be construed as a promise on minimum returns and safeguard of capital. The AMC / Mutual Fund is not guaranteeing or promising or forecasting any returns. Particular trade details are for illustrative purposes only and should not be construed as actual trades/positions taken by HDFC MF/AMC.
Arbitrage trade is unwound at parity
Product Rationale & Positioning
Generate income through arbitrage opportunities arisingout of pricing mismatch in a security between differentmarkets or as a result of special situations.
Completely hedged positions, neutralizes market risk(volatility) and targets absolute returns irrespective ofmarket conditions.
Enhance portfolio returns using different trading strategieswithin derivatives segment
Balance of safety, returns and liquidity
Ris
kReturn
In view of the individual circumstances and risk profile, each investor is advised to consult his / her professional advisor before making a decision to invest in the scheme.
Overnight Funds
Liquid Funds
HDFC Arbitrage Fund
HDFC Ultra Short Term Fund
Short Term Debt Funds
Medium Term Debt Funds
Long Term Debt Funds
4
Investment Strategy
5
Derive returns from the implied cost of carry between the underlying and the derivatives market.
This provides an opportunity to provide returns, possibly higher than the short-term interest rate without taking the market risk.
Implied cost of carry and mis-pricing across the cash & derivative markets can lead to profitable arbitrage opportunities.
The Scheme would carry out strategies, which would be to take offsetting positions on various markets simultaneously. – NoNaked Positions
The overall risk the Scheme would carry would be that of being market neutral i.e. no specific equity risk.
When such opportunities are not available, the scheme may invest in debt securities or money market instruments.
In view of the individual circumstances and risk profile, each investor is advised to consult his / her professional advisor before making a decision to invest in the Scheme. For further details on the investment strategy investors should refer to the Scheme Information Document available on website www.hdfcfund.com.
Why Arbitrage funds?
6
Particulars Arbitrage Fund Liquid Funds
Investment `1,00,000 `1,00,000
Dividends in 6 months `4,000 `4,000
(-) Dividend Distribution Tax
`458 `1,119
Net Tax Return ` 3,542 `2,881
Return (Annualized) 7.08% 5.76%
A comparison of Liquidfunds with Arbitrage fundswith dividend optionthrows up interestingreturn factors from ataxation perspective.
Same is the case with the growth option
Particulars Arbitrage Fund Liquid Funds
Investment `1,00,000 ` 1,00,000
Return over 6 months ` 4,000 ` 4,000
(-) Short Term Capital Gains Tax
` 718 ` 1,710
Net Tax Return ` 3,282 ` 2,290
Return (Annualized) 6.56% 4.58%
Source: Internal data computationThe above simulation is based on highest tax rates applicable to Individual/HUF/Domestic Companies as per Finance Act, 2019 and Finance Act (No. 2) Act, 2019 read with The Taxation Law (Amendment) Ordinance, 2019 (Ordinance 2019) published in the Gazette of India on 20 September, 2019, for illustrative purposes only and should not be construed as a promise on minimum returns and safeguard of capital. It is assumed that the domestic company shall opt for provisions of sec 115BAA. In view of individual nature of the tax consequences, each investor is advised to consult his/her own professional tax advisor. The AMC / Mutual Fund is not guaranteeing or promising or forecasting any returns. These products are not strictly comparable. There is no assurance or guarantee to unit holders as to rate/quantum of dividend distribution nor that the dividends will be paid regularly.
For Individual/HUF For Domestic Companies
Particulars Arbitrage Fund Liquid Funds
Investment `1,00,000 `1,00,000
Dividends in 6 months `4,000 `4,000
(-) Dividend Distribution Tax
`458 `1,332
Net Tax Return ` 3,542 `2,668
Return (Annualized) 7.08% 5.34%
Particulars Arbitrage Fund Liquid Funds
Investment `1,00,000 ` 1,00,000
Return over 6 months ` 4,000 ` 4,000
(-) Short Term Capital Gains Tax
` 699 ` 1,007
Net Tax Return ` 3,301 ` 2,993
Return (Annualized) 6.60% 5.99%
Equity Taxation – What works for Arbitrage?
7
^ For the purpose of determining the tax payable, the amount of distributed income be increased to such amount as would, after reduction of tax from such increased amount, be equal to the income distributed bythe Mutual Fund. The impact of the same has not been reflected above@ Short Term Capital gains will be considered for equity assets held for a period of up to 12 months and up to 36 months in case of debt assets@@ Assets not falling under short term assets will be treated as long term assets.* After providing Indexation$- Finance (No. 2) Act, 2019 provides for enhanced surcharge at 37%, where income of Individual/HUF exceeds Rs. 5 crores and surcharge at the rate 25%, where income of Individual/HUF exceeds Rs. 2 crores but does not exceed Rs. 5 crores. As per the existing rates, surcharge at 15%, where income of Individual/HUF exceeds Rs. 1 crore but does not exceed Rs. 2 crores and surcharge at 10% to be levied in case of Individual/ HUF where income of such unit holders exceeds Rs 50 lakhs but does not exceed Rs. 1 crore. As per the Taxation Law (Amendment) Ordinance, 2019 the enhanced surcharge inserted vide Finance (No. 2) Act, 2019 has been withdrawn on tax payable by both domestic and foreign investors at special rate on income in the nature of long-term and short-term capital gains arising from the transfer of equity share/unit referred to in section 111A and section 112A of the Act#Exemption granted w.r.t. equity oriented fund u/s 10(38) of the Income-tax Act, 1961 has been withdrawn and tax at 10% (without indexation) will be charged on long-term capital gain exceeding Rs. 1 lakh provided that transfer of such units is subject to STT.
The information set out is neither a complete disclosure of every material fact of Income-tax Act 1961 nor does it constitute tax or legal advice. In view of the individual nature of the tax consequences, each investoris advised to consult his/her own professional tax advisor.
For Resident Individuals/HUF$
Taxes Applicable Arbitrage FundsLiquid Funds/
Debt Funds
Dividend Distribution Tax^ 11.648% 29.120%
Short Term Capital Gains@ 17.94%/17.16% 35.88%/34.32%/39%/42.74%
Long Term Capital Gains@@ 11.96%/11.44%# 23.92%/22.88%/26%/28.496%*
Equity Taxation – What works for Arbitrage?
8
For Domestic Companies$
& For the purpose of determining the tax payable, the amount of distributed income be increased to such amount as would, after reduction of tax from such increased amount, be equal to the income distributedby the Mutual Fund. The impact of the same has not been reflected above@ Short Term Capital gains will be considered for equity assets held for a period of up to 12 months and up to 36 months in case of debt assets@@ Assets not falling under short term assets will be treated as long term assets.* After providing Indexation$- Surcharge at the rate of 7% is levied for domestic corporate unit holders where the income exceeds Rs 1 crore but is less than Rs 10 crores and at the rate of 12%, where income exceeds Rs 10 crores.^ - It is assumed that the domestic company shall opt for provisions of sec 115BAA . Accordingly, surcharge rate of 10% shall be applicable#Exemption granted w.r.t. equity oriented fund u/s 10(38) of the Income-tax Act, 1961 has been withdrawn and tax at 10% (without indexation) will be charged on long-term capital gain exceeding Rs. 1 lakhprovided that transfer of such units is subject to STT.
- Domestic companies may subject to minimum alternate tax which is not specified in above tax rates. Not applicable in case domestic company has opted for sec 115BAAThe information set out is neither a complete disclosure of every material fact of Income-tax Act 1961 nor does it constitute tax or legal advice. In view of the individual nature of the tax consequences, eachinvestor is advised to consult his/her own professional tax advisor.
Taxes Applicable Arbitrage FundsLiquid Funds/
Debt Funds
Dividend Distribution Tax& 11.648% 34.944%
Short Term Capital Gains@ 17.472%/16.692% 25.17^
Long Term Capital Gains@@ 11.648%/11.128%# 23.296%/22.256%*
Fund Suitability
9
Completely hedged positions enables investors to earn the spread between the spot and futuremarkets, indifferent to market movements
Tax efficiency of an equity oriented scheme.
For those who do not want any directional exposure
Ideal investment horizon 3 – 6 months.
In view of the individual circumstances and risk profile, each investor is advised to consult his / her professional advisor before making a decision to invest in this scheme.
Portfolio Facts & Composition
10
Particulars Amount
AUM 5,268.14 Cr.
Outstanding Derivative Exposure
3,532.86 Cr.
Data as on September 30th 2019. For Complete portfolio details please refer to the fund website www.hdfcfund.com.
Hedged Equity67%
Fixed Deposit16%
Credit Exposure13%
Cash, Cash Equivalent and Net Current Assets4%
Product Features
11
Type of Scheme An open ended scheme investing in arbitrage opportunities
Inception Date
(Date of allotment)October 23, 2007
Investment ObjectiveTo generate income through arbitrage opportunities and debt & money market instruments. There is no assurance that the investmentobjective of the Scheme will be realized.
Fund Manager $ Mr. Krishan Kumar Daga
Plans Direct Plan, Regular Plan (Wholesale)
Sub-Options(i) Growth Option and (ii) Dividend Option
Dividend Option offers Monthly Dividend Option and Normal Dividend Option with Payout and Reinvestment facility.
Minimum Application Amount
(Under Each Plan/Option)Purchase / Additional Purchase: Rs. 1,00,000 and any amount thereafter.
Load Structure
Entry Load:• Not Applicable.Upfront commission shall be paid directly by the investor to the ARN Holder (AMFI registered Distributor) based on the investors’assessment of various factors including the service rendered by the ARN Holder.
Exit Load:• In respect of each purchase / switch-in of units, an Exit Load of 0.25% is payable if Units are redeemed / switched-out within 1 month
from the date of allotment. • No Exit Load is payable if Units are redeemed / switched-out after 1 month from the date of allotment.
In respect of Systematic Transactions such as SIP, Flex SIP, GSIP, STP, Flex STP, Swing STP, Flex index, Exit Load, if any, prevailing on the dateof registration / enrolment shall be levied. For further details on load structure, please refer to the Scheme Information Document/Keyinformation memorandum of the Scheme.
Benchmark Index NIFTY 50 Arbitrage Index (Total Returns Index)
$ Dedicated Fund Manager for Overseas Investments: Mr. chirag Dagli
Asset Allocation Pattern
12
Under normal circumstances, the asset allocation of the scheme’s portfolio will be as follows:
Types of InstrumentsMinimum Allocation
(% of Total Assets)
Maximum Allocation (% of Total Assets)
Risk Profile
Equity and Equity relatedinstruments
65 90 Medium to High
Derivative including indexfutures, stock futures IndexOptions and Stock Options etc
65 90 Medium to High
Other derivative opportunities 0 20 Medium to High
Debt Securities (includingsecuritised debt) and moneymarket instruments
10 35Low to Medium
Units issued by REITs and InvITs 0 10 Medium to High
Non-convertible preferenceshares
0 10 Low to Medium
For further details, refer SID, KIM available on website www.hdfcfund.com and at Investor Service Centres (ISCs) of HDFC Mutual FundContd…
Asset Allocation Pattern … (contd. From previous page)
13
In defensive circumstances the asset allocation will be as per the below table:
Types of InstrumentsMinimum Allocation
(% of Total Assets)
Maximum Allocation (% of Total Assets)
Risk Profile
Equity and Equity relatedinstruments
0 65 Medium to High
Derivative including index futures,stock futures Index Options andStock Options etc
0 65 Medium to High
Other derivative opportunities 0 20 Medium to High
Debt Securities (includingsecuritised debt) and moneymarket instruments
35 100 Low to Medium
Units issued by REITs and InvITs 0 10 Medium to High
Non-convertible preference shares 0 10 Low to Medium
The Scheme may invest in the schemes of Mutual Funds in accordance with the applicable extant SEBI (Mutual Funds) Regulations as amended from time to time. The scheme mayinvest up to a maximum 35% of the total assets in foreign securities and up to 100% of its total assets in derivatives.For further details, refer SID, KIM available on website www.hdfcfund.com and at Investor Service Centres (ISCs) of HDFC Mutual Fund
Disclaimer & Risk Factors
14
This presentation, dated 14thOctober 2019, has been prepared by HDFC Asset Management Company Limited (HDFC AMC) based on
internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant asguidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only.The document is given in summary form and does not purport to be complete. The document does not have regard to specific investmentobjectives, financial situation and the particular needs of any specific person who may receive this document. The information/ data hereinalone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements containedherein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performanceor events to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in future.Neither HDFC AMC and HDFC Mutual Fund nor any person connected with them, accepts any liability arising from the use of this document.The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professionaladvice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.