2 Best Arbitrage Mutual Funds For SIP In 2022

Investors seeking to start SIP in mutual funds can look for arbitrage mutual funds in the prevailing turbulent market when taking too much risk can be detrimental for their risk appetite. This fund category strives to buy and sell securities in a variety of market scenarios. As a consequence, this fund is best suited during bearish markets since the fund manager buys stock in the cash market and sells it in the futures or derivative market. Investors with a low-risk tolerance searching for special tax treatment, such as equity schemes, and who wish to build mid-term wealth through equity exposure in the face of market volatility here we have picked two arbitrage mutual funds that have been rated No.1 by CRISIL as of 31st December 2021 and also have lower expense ratio and higher annualized return than the category average.

Kotak Equity Arbitrage Fund

The scheme, which has been in existence since 2013, is a medium-sized fund of its category from the fund house Kotak Mahindra Mutual Fund. The 1-year returns for Kotak Equity Arbitrage Fund Direct-Growth are 4.79 percent. It has generated an average yearly return of 7.06 percent since its inception.

The fund's equity portion is largely focused in the Financial, Services, Energy, Technology, and FMCG sectors, and the fund's top 5 holdings are Kotak Liquid Plan A - Growth, Kotak Floating Rate Short-term Scheme Direct-Growth, Reliance Industries Ltd., ICICI Bank Ltd., HCL Technologies Ltd.. The fund currently has a -0.10 percent equity allocation and a 24.2 percent debt exposure.

The fund's expense ratio is 0.43 percent, which is comparable to the expense ratios charged by most other funds in the same category. As of December 31, 2021, Kotak Equity Arbitrage Fund Direct-Growth has Rs 25,013.48 crores in assets under management (AUM) and a net asset value (NAV) of Rs 31.57 crores as of 18th Feb 2022.

Trailing Returns	Since Inception	10Y	7Y	5Y	3Y	1Y	YTD
Kotak Equity Arbitrage Fund - Direct (G)	7.06	-	6.28%	5.86%	5.36%	4.79%	4.33%
Nifty 50 Arbitrage TRI	5.87	6.14%	5.11%	4.42%	4.34%	4.31%	3.65%
Alpha (Tier 1)	1.19	-	1.18%	1.44%	1.01%	0.48%	0.68%
Crisil 1 Yr T-Bill Index	6.57	6.71%	6.37%	5.87%	5.39%	3.72%	3.20%
Alpha (Tier 2)	0.48	-	-0.09%	-0.01%	-0.03%	1.07%	1.13%
Data as of 21/02/2022. Source: kotakmf.com

SBI Arbitrage Opportunities Fund

SBI Arbitrage Opportunities Fund, a hybrid fund, has been there since November 03, 2006, with Rs 5329.56 crores in assets under management (AUM) as of 31/12/2021 and a NAV of Rs 14.31 as of 18th February 2022.

The fund has an expense ratio of 0.84 percent and currently has a 0.6 percent equity allocation and a 30.1 percent debt exposure. The SBI Arbitrage Opportunities Fund has returned 4.26 percent over the last year and has returned an average of 6.76 percent every year since its inception.

The equity segment of the fund is mostly concentrated in the financial, services, energy, metals, and fast-moving consumer goods sectors. Reserve Bank of India, SBI Savings Fund Direct-Growth, Adani Ports and Special Economic Zone Ltd., Reliance Industries Ltd., and TVS Credit Services Ltd. are the fund's top five holdings.

For the past 1 to 5 years, the fund has continuously generated higher annualised returns and has surpassed its category average, and also the average credit rating of the fund's debt holdings are AAA rated which indicates the credit quality.

Compounded Annualized Growth Rate Performance	Last 1 Year	Last 3 Year	Last 5 Year	Since Inception(03/11/2006)
SBI Arbitrage Opportunities Fund	4.26%	4.45%	5.04%	6.76%
Scheme Benchmark: - Nifty 50 Arbitrage Index	4.54%	4.32%	4.43%	N.A.
Additional Benchmark: - Crisil 1 Yr T-Bill Index	3.52%	5.42%	5.83%	6.21%
Source: sbimf.com

Should you invest?

Arbitrage funds received a net positive inflow of Rs 954.98 crore under the hybrid scheme category, with Net Assets Under Management of Rs 1,01,757.62 crore as of January 31, 2022, and Average Net Assets Under Management of Rs 1,15,463.75 crore for the month of January 2022. As can be seen from the accompanying numbers, the fund has managed to perform well in unfavourable market conditions where the existing cushion of debt instruments swings the situation.

Arbitrage funds must invest at least 65 percent in equity and the remainder in debt, according to the Securities and Exchange Board of India (SEBI), making them less risky than pure equity funds. Risk-averse investors seeking higher mid-term returns than fixed deposits might consider starting a SIP in the above-mentioned funds, but only during negative or turbulent market conditions, as pure equities funds always outperform in bullish markets.

Given the fund's approach to price differentials in current and future markets, these funds might be a strong bet when the market is volatile and not stable.

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