Derivative Segment Exposure of Arbitrage Mutual Funds

Tightening mutual fund regulations, particularly those of debt mutual funds, by the Indian securities market regulator – the Securities and Exchange Board of India (SEBI) are making Arbitrage funds get attention. Low risk, attractive tax treatment, and convenience caught investor interest, and thereby, increased fund flow into these schemes. Fund managers can load their arbitrage schemes with a minimum of 65 percent exposure to equity and equity-equivalent exposure to explore arbitrage opportunities in the stock market for hedging or portfolio balancing. This paper examines if the fund managers of Indian arbitrage schemes form their equity and derivatives portion of their portfolio keeping in mind the Nifty Arbitrage 50 index. The market volatility factor Nifty VIX is examined against the scheme composition. This research finds that there exists a low degree of a positive correlation between the equity and derivative holdings of mutual fund schemes against the Nifty Arbitrage 50 Index and the Nifty VIX index. Further, only in the case of the HDFC Arbitrage Fund (equity holding) and Nippon India Arbitrage Fund (debt holding) make a significant impact based on the Nifty Arbitrage 50 Index and the Nifty VIX index. Results show that fund managers use their native or in-house methodology of formulating the portfolio and the weights independent of the Nifty Arbitrage 50 and Nifty VIX value. Further, fund managers prefer participating in the stock futures segment (over the options) of the Indian derivatives market