IDFC Arbitrage Fund

(An open ended scheme investing in arbitrage opportunities)

Arbitrage Fund Basics 101:

Buying in one market and selling in another simultaneously to take advantage of a temporary price differential is called arbitrage.

For instance, if you could buy A in Gujarat at INR 100 and sell it in Mumbai simultaneously at INR 101, you could make INR 1 profit at
very low risk. This opportunity arises out of market inefficiency and is the basis of every arbitrage trade.

Cash-Futures Arbitrage

Since the cash market price converges with the futures price at the end of the month, you tend to make a very low risk return of
(101-100)*12/100 = 12% p.a. (for illustrative purpose only)

Fund
This trade effectively captures the interest rate component in the equity futures market and does not involve taking any directional
exposure to the equity market.

An Arbitrage fund invests in arbitrage opportunities in the cash and the derivative segments of the equity markets. It aims to capture
the spread (Cost of Carry) between the cash and futures market by simultaneously executing buy (in the cash market) and sell (in the
futures market) trades. The balance is invested in debt and money market instruments.

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The fund typically follows a strategy of taking market neutral (equally offsetting) positions in the equity market making it a
moderately low risk product irrespective of movements in equity market.

Update on the recent market move:

The Indian markets, in tandem with global markets, have been witnessing heightened volatility since mid-February 2020 led by
Covid-19 pandemic. During this period the broader markets corrected significantly; a situation witnessed only during global panic
and meltdown.

The recent sell-off in the cash market and shorting in the derivatives markets had led to the stock future trading at a discount to the
cash price, impacting core arbitrage spreads across the industry. Further the selling pressures in the local bond market resulted in
rising yield situation in the debt portion of the arbitrage fund (negatively impacting the fund performance).

Spread between Nifty Future and Nifty:

Source: Bloomberg

In order to tackle the volatility witnessed by the markets in recent weeks, SEBI announced certain measures to bring stability to the
markets.

As the sharp down move in the market has started moderating, the arbitrage yields have stabilized.
 Market Wide Rollover for April was 86% vs 85.5% average of last 2 expiries.
 Market Wide Futures Open Interest (OI) stood at ~INR 70,839cr (v/s INR 132,893cr March start) at beginning of April series.
 Nifty rollover was at 54% v/s 68% average of last 2 expiries.
 Nifty April series starts with an OI of INR 10,049cr v/s INR 17,690cr in March series (322k contracts v/s 165k contracts)
Source: NSE, IDFC MF
th
The average annualized yield of the arbitrage book including FD as on March 26 is ~5.55%.
The yield referred to here is the weighted average spread of the arbitrage portion (including Margin FD) and does not in any manner indicate performance of the
scheme and does not in any manner indicate any return potential of the scheme

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Our analysis of the historical rolling return based on 1 month return and 2 month returns during the financial crises of 08-09, shows
that in the past too, 1 month returns have been negative but the same had lasted for couple of days only. The fund returns on 6
months (ideal investment horizon) rolling basis have been in the positive range as detailed below:

1 month rolling return 15 2 months rolling return

20
15 10
10
5
5
0 0
Dec-07

Dec-08
Jun-07

Jun-08
Mar-07

Mar-08

Mar-09
Sep-07

Sep-08

Feb-19
Feb-07

Feb-09

Feb-11

Feb-13

Feb-15

Feb-17
-5

15 6 months rolling return

10

0
Mar-09
Mar-07

Mar-08

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17
Sep-17
Mar-18

Mar-19

Mar-20
Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-18

Sep-19
Data since inception of the fund, Source: MFI

As seen from the above charts, as we increase the investment horizon, the volatility of the fund may reduce – thereby improving
investors’ experience. (Past performance may or may not be sustained in future).

Going forward:

The fund manager continuously seeks to modify his portfolio with an aim to improve the return potential of the arbitrage book. The
fund manager may change the portfolio holdings anytime during the month with an aim to take advantage of better spreads, if the
same is available. For example, if the fund manager’s position is trading at a spread of 30bps and if another stock is available at a
spread of 70bps during the month, the fund manager may choose to unwind his existing position and take fresh position in the new
stock at a higher spread. (For illustrative purpose to explain the concept of taking arbitrage positions in the Scheme)

The arbitrage portion of the portfolio may experience MTM (Marked-to-Market) losses in conditions where the spreads move up
and vice versa when spreads go down. For example, in the recent case, the fund performance improved when spreads turned
th
negative (this however may not be an ideal scenario for fresh deployment) i.e. when Nifty spreads were -86bps on 16 March’20,
the IDFC Arbitrage Fund’s one month return was 9.08%. Conversely, when the spreads started to rise, the fund performance
dipped/turned negative i.e. when Nifty spreads rose to 63bps the 1 month performance fell to -0.72%. Also, mid-month rollover
positions based on the following month’s futures may lead to MTM losses/gains on the date of expiry as these positions do not
converge to the stock price on settlement date.

The fund would look to maintain the average for the Fiscal Year at 65% plus portion in the Arbitrage portion in order to benefit from
equity taxation. The debt portion of the fund (including Margin FD) has traditionally been around 30-35%. The debt portion is
actively managed but has a conservative maturity profile. Further the debt portion of the fund emphasizes on a high quality profile –
100% AAA/Sovereign/A1+ portfolio.
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In spite of the recent volatility witnessed by the category, we continue to believe that the Arbitrage Category continues to remain
attractive for the investment horizon of over 6 months and may offer better return potential and tax efficient option for a short
term investment strategy.

Performance Table

Performance Table

CAGR Return (%) Current Value of Investment of Rs.10,000

Scheme Name
Since Inception Since Inception
1 Year 3 Years 5 Years 1 Year 3 Years 5 Years
Dec 21, 2006 Dec 21, 2006
IDFC Arbitrage Fund 5.95% 5.97% 6.13% 7.04% 10,595 11,902 13,470 24,677
Nifty 50 Arbitrage Index# 6.04% 5.26% 5.67% NA 10,604 11,666 13,177 NA
Nifty 50 TRI## -24.85% -0.81% 1.56% 7.57% 7,515 9,757 10,807 26,373
Performance based on NAV as on 31/03/2020. Past performance may or may not be sustained in future.
The performances given are of regular plan growth option.
Regular and Direct Plans have different expense structure. Direct Plan shall have a lower expense ratio excluding distribution expenses, commission
expenses etc.
#Benchmark Returns. ##Alternate Benchmark Returns.

Performance Table
(Others Funds Managed by the Fund Managers)

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Performance based on NAV as on 31/03/2020. Past Performance may or may not be sustained in future
The performance details provided herein are of regular plan growth option. Regular and Direct Plans have different expense structure.
Direct Plan shall have a lower expense ratio excluding distribution expenses, commission expenses etc.
5The fund has been repositioned w.e.f. May 28, 2018 and since will invest only in the schemes of IDFC Mutual Funds.
^Current Index performance adjusted for the period from since inception to May 28, 2018 with the performance of CRISIL Hybrid 85+15 Conservative Index
^^Current Index performance adjusted for the period from since inception to April 6, 2015 with the performance of CRISIL Short Term Bond fund index (Benchmark)
& 1 year T Bill Index (Alternate Benchmark) .
2The fund has been repositioned from an IPO fund to a large cap fund w.e.f. April 18, 2017
7The fund has been repositioned from a floating rate fund to a money market fund w.e.f. June 4, 2018.
¥Current Index performance adjusted for the period from since inception to April 30, 2018 with the performance of CRISIL Liquid Fund Index (Benchmark)
§Current Index performance adjusted for the period from since inception to June 28, 2007 with the performance of S&P BSE 100 price return index (Benchmark)
ßCurrent Index performance adjusted for the period from since inception to May 28, 2018 with the performance of I-Sec Si Bex (Benchmark)
PRODUCT LABEL

IDFC Arbitrage Fund

(An open ended scheme investing in arbitrage opportunities)

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Disclaimer:
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency about the
investment strategy / theme of the Scheme and should not be treated as endorsement of the views / opinions or as an investment
advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document
has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis
of IDFC Mutual Fund. The information/ views / opinions provided is for informative purpose only and may have ceased to be current
by the time it may reach the recipient, which should be taken into account before interpreting this document. The recipient should
note and understand that the information provided above may not contain all the material aspects relevant for making an
investment decision and the security may or may not continue to form part of the scheme’s portfolio in future. Investors are advised
to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and
horizon. The decision of the Investment Manager may not always be profitable; as such decisions are based on the prevailing market
conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends. This
information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to
this statement as may be required from time to time. Neither IDFC Mutual Fund / IDFC AMC Trustee Co. Ltd./ IDFC Asset
Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental,
punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the
information.

01-Apr-20