Kotak Arbitrage Fund delivered a 7.0% compound annual return over three years, leading its peers in the category. With an AUM exceeding ₹72,000 crore, the fund remains a major player, though it trailed its benchmark slightly over the same period.
What Happened
Kotak Arbitrage Fund has secured the top position for three-year compound annual growth rate (CAGR) returns among arbitrage mutual funds. According to data compiled as of June 29, the fund delivered a return of 7.0% over this three-year period. It leads the category, marginally outperforming competitors like UTI Arbitrage Fund and Invesco India Arbitrage Fund, which both recorded a 6.9% return for the same timeframe. With assets under management (AUM) of ₹72,079.2 crore, Kotak Arbitrage Fund holds the largest corpus among funds meeting the ₹1,500 crore size criteria.
The Benchmark Gap
While the fund leads in three-year returns, it has struggled to beat its benchmark index. Over the three-year period, the benchmark index returned 7.5%, meaning the fund trailed it by 0.5 percentage points. This gap widened over a one-year timeframe, where the fund lagged the benchmark by 1.1 percentage points, with the benchmark returning 6.9%. For investors, this performance difference is important because it shows the fund is not always able to match the index it tracks.
How Arbitrage Funds Work
Arbitrage funds are designed to generate returns by identifying price differences between the cash market (where stocks are bought and sold for delivery) and the derivatives market (futures and options). By buying in the cash market and simultaneously selling in the derivatives market, the fund locks in a profit from the price difference, often called the "spread." Because they do not take large directional bets on the stock market, these funds are generally considered to have lower risk compared to equity-oriented funds. However, their returns are directly influenced by the volatility and liquidity in the derivatives market.
Performance Shifts Across Time
Performance in the arbitrage category is dynamic, with leadership changing based on the time horizon. While Kotak Arbitrage Fund stands out over a three-year period, other funds have led in shorter durations. For example, UTI Arbitrage Fund posted a 1.0% gain over one month, and HDFC Arbitrage Fund recorded a 1.5% return over three months. This variation highlights that investors cannot rely solely on long-term performance records to judge a fund's immediate ability to capture market opportunities.
What Investors Should Track
Since arbitrage funds rely on market inefficiencies, returns are not fixed. Investors may keep an eye on how well the fund captures these spreads over time. The primary risks remain the availability of arbitrage opportunities and the cost of maintaining positions. If spreads become too thin or market liquidity drops, it can impact the fund's ability to generate returns. Regularly reviewing how consistently a fund tracks its benchmark, rather than looking only at past gains, can help in understanding the fund's operational efficiency.