Motilal Oswal Arbitrage Fund - Direct (G)

The Motilal Oswal Arbitrage Fund is an innovative solution for investors seeking low-risk, tax-efficient returns while leveraging arbitrage opportunities in the market. This open-ended equity scheme capitalises on price differentials between cash and derivative markets, offering stability and predictable performance. By employing a passive investment strategy, the fund minimises volatility and provides an attractive alternative to liquid and debt funds. Its equity taxation benefits further enhance its appeal, especially for those in higher tax brackets.

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This fund offers flexibility and convenience, catering to both new and experienced investors. With a low entry point of just ₹500, it enables participation in arbitrage opportunities without a significant financial commitment. The fund is benchmarked against the Nifty 50 Arbitrage Index TRI, which accurately reflects its passive and risk-neutral investment strategy.

Investment Objective and Strategy

Objective:

The Motilal Oswal Arbitrage Fund aims to deliver stable, tax-efficient returns by predominantly investing in arbitrage opportunities between the cash and derivative markets and within the derivative segment. Complementary investments in debt securities and money market instruments ensure liquidity and consistent performance, even in volatile market conditions. While the fund seeks to achieve these goals, it does not guarantee returns, as performance is subject to market dynamics.

Investment Strategy:

The Motilal Oswal Arbitrage Fund uses several carefully planned strategies to generate steady returns while keeping risks low. At the heart of their approach is cash-futures arbitrage, where the fund looks for price differences between immediate (spot) and future prices of the same stock. For instance, when they spot a stock trading at ₹100 in the regular market but priced at ₹102 in the futures market, they buy it at the lower price and simultaneously sell it at the higher price, securing a safe profit without taking market risks.

The fund also pays close attention to company dividend announcements, which often create temporary price differences between markets. By positioning themselves carefully during these events, they can capture additional returns. Similarly, when companies announce share buybacks, the fund takes advantage of the difference between the buyback price and the current market price, adding another source of steady returns to their portfolio.

To maintain stability when attractive trading opportunities are scarce, the fund invests in high-quality debt instruments and money market tools. This ensures that investor money keeps earning returns while staying safe and easily accessible. The fund managers regularly review and adjust their investments to stay aligned with market changes and their core goal of providing reliable returns.

Throughout all these activities, the fund maintains a balanced approach, never taking one-sided market risks. This careful strategy helps them deliver consistent performance that investors can count on, making it particularly suitable for those who value predictable returns over the possibility of higher but riskier gains.

Strengths and Risks - Motilal Oswal Arbitrage Fund - Direct (G)

Strengths:

Market-Neutral Approach: The fund adopts a balanced strategy by taking equal and opposite positions in the cash and futures markets. This eliminates directional market risks and delivers consistent returns.

Low Volatility: With pre-defined spreads and locked-in returns, the fund minimises exposure to market fluctuations, ensuring stability for risk-averse investors.

Tax Efficiency: As the fund qualifies for equity taxation, investors benefit from favourable tax treatment on long-term capital gains, making it more cost effective than traditional debt funds.

Alternative to Debt Funds: For conservative investors, the fund serves as a low-risk alternative to liquid and debt funds, offering better returns with similar safety.

Diversification and Liquidity: By maintaining a diversified portfolio of arbitrage positions and debt securities, the fund ensures adequate liquidity and risk mitigation.

Risks:

Tracking Error: Minor deviations from the benchmark's performance may arise due to operational constraints or timing delays during portfolio rebalancing.

Basis Risk: Discrepancies between spot and futures prices could lead to variations in the expected returns from arbitrage strategies.

Market Liquidity Risk: Certain securities in the portfolio may become less liquid during market stress, potentially impacting the execution of arbitrage strategies.

Execution Risk: The timing of trades plays a crucial role in achieving the desired returns. Delays or inefficiencies in execution may slightly affect the fund's performance.

Limited Upside Potential: While the fund offers stability, it lacks the aggressive growth potential of actively managed equity funds, making it more suitable for conservative investors.

Why Invest in Motilal Oswal Arbitrage Fund - Direct (G)?

The Motilal Oswal Arbitrage Fund is designed to help investors protect their money while earning steady returns. Think of it as a low-risk investment option that focuses on playing it safe rather than chasing high profits. The fund works by taking advantage of price differences in the market, which helps it generate consistent returns even when the market is unstable.

One of its biggest benefits is the tax advantage it offers. Since it's classified as an equity fund, investors pay less tax on their profits when they stay invested for the longer term. This makes it especially valuable for people who fall in higher tax brackets and want to keep more of their earnings.

To protect investors' money, the fund spreads investments across different market opportunities and includes some debt investments too. This is like not putting all your eggs in one basket. Getting started is easy - you don't need a huge amount to begin investing, and you can put money in or take it out without much hassle.

This fund is perfect for people who want to invest their money for a few months to a few years and care more about keeping their investment safe than making aggressive profits. It's particularly good for careful investors who want predictable returns without taking big risks.