Hybrid long-short strategies under the newly launched Specialised Investment Funds (SIFs) are beginning to challenge popular mutual fund categories such as arbitrage funds and balanced advantage funds (BAFs).
Fund houses are increasingly marketing these products as "arbitrage-plus" or "balanced advantage-plus" offerings, giving more flexibility and higher returns than the previously mentioned traditional mutual fund categories.
If the trend gathers pace, hybrid SIFs may challenge the ₹3.44 trillion arbitrage mutual fund category and the ₹2.54 trillion BAF category, say experts.
A section of corporates and retail investors is already moving their money from arbitrage and BAF funds into hybrid SIFs, multiple distributors told Mint.
Hybrid SIFs now make up 71% of the total SIF assets of ₹17,858 crore as of June end, per the Association of Mutual Funds in India (Amfi).
“We have seen interest for hybrid SIFs coming from institutions as well as retail investors,” said Sandeep Seth, founder and CEO at SIF 360, a SIF research platform and a SIF distributor. “Our average ticket size in SIFs is ₹33 lakh, which shows that even retail investors are interested,” Seth added.
BAF dynamically shifts between equity and debt based on market conditions to balance risk and returns , while arbitrage funds generate returns by exploiting price differences between the cash and futures markets.
ICICI Prudential’s ISIF hybrid long-short fund, Tata’s Titanium hybrid long-short fund, and Quant’s Qsif hybrid long-short fund have positioned themselves in the BAF plus category. Bandhan’s Arudha hybrid long-short fund and Edelweiss’ Altiva hybrid long-short fund have also positioned themselves in the arbitrage fund plus category.
The key differentiator is flexibility, experts add. Arbitrage funds can make returns by the difference between cash and futures markets, but hybrid SIFs (positioned as arbritrage plus) can take directional equity exposure, take unhedged long and short positions or even take calls in special situations, said Manish Kothari, co-founder at ZFunds, a mutual fund and SIF distributor.
The added flexibility allows fund managers to keep risk relatively low while aiming to generate slightly higher returns than traditional arbitrage funds, said Kothari.
While experts said hybrid SIFs are not directly comparable with arbitrage funds or BAFs because of their wider investment mandate, the new products have delivered stronger returns over a limited tracking period.
The biggest arbitrage fund, Kotak Arbitrage Fund, has returned 3.75% in the last six months, per Value Research. Funds positioning themselves as arbitrage plus like Altiva hybrid long-short SIF have returned 6.19% and Arudha hybrid long-short fund has given 3.33% over the same period, per SIF 360.
The largest BAF fund, HDFC BAF, has delivered 0.46% returns over the last six months, QSIF hybrid long-short fund has given 9.87%, ISIF has given 5.85%, and Titanium has given 1.45% in the last six months.
The comparison is limited to six months because SIFs were launched only recently.
Taxation is another factor keeping investors interested in the product.
Arbitrage funds and BAFs are taxed as equity funds, with long-term capital gains taxed at 12.5% after a one-year holding period. Many hybrid SIFs are also encouraging investors to stay invested for at least a year to qualify for similar long-term equity tax treatment.
However, investors exiting a hybrid SIF before one year are taxed at their applicable marginal income-tax rate rather than the 20% short-term capital gains tax applicable to equity funds, Seth said. "Investors should ideally remain invested for at least one year to maximise post-tax returns," he added.
What next?
Some money may naturally shift from arbitrage funds and BAF as hybrid long-short SIFs gain traction.
However, the products serve different purposes and have distinct risk profiles, said Vaibhav Shah, head of products, business strategy, and international business at Mirae Asset Mutual Fund.
"Investors typically use arbitrage funds for short-term parking of money with minimal volatility. Hybrid long-short SIFs, on the other hand, are meant for investors with a longer investment horizon who are willing to take slightly higher risk for potentially better returns," Shah said, adding that arbitrage funds will continue to have their own utility despite the emergence of the new category.
Niharika Tripathi, head of products and research at Wealthy, a mutual fund and SIF distributor, said that SIFs have the ingredients for long-term growth. “However, the category is still at a nascent stage, with limited track records, meaning adoption is likely to be gradual rather than rapid. Most investors are expected to wait for longer performance histories before making SIFs a core part of their portfolios,” Tripathi said.
The minimum ticket size for SIFs is at ₹10 lakh while there is no minimum ticket size for mutual funds. The maximum base expense ratio for SIFs as well as mutual funds is 2.1% for equity SIFs and 1.85% for debt SIFs. Same is the case for mutual funds.