ETMutualFunds looked at the portfolio turnover ratio of all equity mutual fund schemes. We noticed that the arbitrage fund category has a very high turnover ratio among all equity and equity-oriented schemes. Arbitrage Funds had a higher portfolio turnover ratio of 800-2,300 in January 2023. The average portfolio turnover ratio for the arbitrage fund category has been 1,462% in January 2023.
Why do arbitrage schemes have such a high portfolio turnover ratio? “Arbitrage funds by their investment mandate look to capture the arbitrage spread between cash and futures market. That is buying a stock in the cash market and selling a corresponding number of the stock futures(which are trading at a higher price), thus locking in the premium that the stock futures are trading vs the cash market. These positions are typically squared off on the futures expiry date each month or carried over to the next month, depending on the spread that is available for the futures for that stock in the next month. This causes the portfolio turnover to be higher,” says Kaustubh Belapurkar, Director, Fund Research, Morningstar Investment Adviser India
Source: ACE MF, Data as on January 2023
Mirae Asset Arbitrage Fund had the highest portfolio turnover ratio of 2,216%, followed by Invesco India Arbitrage Fund which had a portfolio turnover ratio of around 2,186%.
Raj Talati, Certified Financial Planner and partner, ABM Investment, says “The portfolio turnover ratio is going to be high whenever the market is volatile. Arbitrage takes advantage of that volatile market. Whenever the market is volatile, they get a higher cost of carry, and that is what they try to encash.”
Sure, these schemes are exploiting the volatility to make better returns. But are they performing better? The arbitrage fund category offered an average return of around 2.89% in the last six months. Invesco India Arbitrage Fund, one of the schemes with higher portfolio turnover, was the topper in the six month horizon. The scheme offered around 3.37%. Baroda BNP Paribas Arbitrage Fund, another scheme with higher portfolio turnover ratio, offered 2.91% returns. In the one-year horizon, the arbitrage fund category offered around 4.22% returns. Invesco India Arbitrage Fund was the topper even in the one-year horizon and offered around 5.32%. Baroda BNP Paribas Arbitrage Fund offered 4.02% returns.
Finally, should investors be concerned about the high portfolio turnover ratio in their arbitrage schemes? “If returns are good and the portfolio turnover ratio is high it is ok. But if the market is not moving anywhere and the portfolio turnover ratio is high then it is a matter of worry,” says Raj Talati, CFP and partner, ABM Investment.
Please note, we are discussing arbitrage funds here. For equity schemes, a lower portfolio turnover is considered beneficial.
