HD HDFC Ar Arbi bitrage Fun e Fund (An o n open e pen ende nded s schem eme i e inv nvestin ing i g in arbit bitrage oppo pportunit nities ies) An Inc An ncome Gene Generating E Equ quity I Inv nvest stmen ent This product is suitable for investors who are seeking* • Income over short term. • Income through arbitrage opportunities between cash and derivative market and arbitrage opportunities within the derivative segment *Investors should consult their financial advisers if in doubt about whether the product is suitable for them. April 2019 1
Arbitrage – The Concept The arbitrage concept works off on mispricing of assets across different markets due to the underlying inefficiencies in market pricing. The illustration alongside gives a general idea of how the arbitrage fund takes advantage of such mis-pricing. All positions are completely hedged and hence the strategy mitigates the risk associated with market volatility. E.g. Assume stock price of ABC Ltd. is at Rs.190/- in the cash market. This stock is also traded in the derivatives segment, where its future price is Rs.197/- In such a case, one can make a risk-free profit by selling a futures contract of ABC Ltd. at Rs. 197/- and simultaneously buy an equivalent number of shares in the equity market at Rs 190/-. On settlement day, it wouldn’t matter which direction the stock price has taken in the interim. Because on the expiry day (settlement date) the price of equity shares and their futures tend to converge. (Also refer illustration on slide 3) 2 HDFC Mutual Fund/AMC is not guaranteeing returns on investments made in this scheme. The example ignores all transaction related costs.
Capturing The Difference between Future & Spot Arbitrage trade is unwound at parity The above simulation is for illustrative purposes only and should not be construed as a promise on minimum returns and safeguard of capital. The AMC / Mutual Fund is not guaranteeing or promising or forecasting any returns. Particular trade details are for illustrative purposes only and should not be construed as actual trades/positions taken by HDFC MF/AMC. 3
Product Rationale & Positioning Generate income through arbitrage opportunities arising out of pricing mismatch in a security between different markets or as a result of special situations. Risk Long Term Debt Medium Completely hedged positions, neutralizes market risk Funds Term Debt Short Term (volatility) and targets absolute returns irrespective of Funds Debt HDFC Ultra market conditions. Funds Short Term HDFC Fund Arbitrage Liquid Fund Funds Overnight Enhance portfolio returns using different trading strategies Funds within derivatives segment Balance of safety, returns and liquidity Return In view of the individual circumstances and risk profile, each investor is advised to consult his / her professional advisor before making a decision to invest in the scheme. 4
Investment Strategy Derive returns from the implied cost of carry between the underlying and the derivatives market. This provides an opportunity to provide returns, possibly higher than the short-term interest rate without taking the market risk. Implied cost of carry and mis-pricing across the cash & derivative markets can lead to profitable arbitrage opportunities. The Scheme would carry out strategies, which would be to take offsetting positions on various markets simultaneously. – No Naked Positions The overall risk the Scheme would carry would be that of being market neutral i.e. no specific equity risk. When such opportunities are not available, the scheme may invest in debt securities or money market instruments. In view of the individual circumstances and risk profile, each investor is advised to consult his / her professional advisor before making a decision to invest in the Scheme. For further details on the investment strategy investors should refer to the Scheme Information Document available on website www.hdfcfund.com. 5
Why Arbitrage funds? For Individual/HUF For Domestic Companies Particulars Arbitrage Fund Liquid Funds Particulars Arbitrage Fund Liquid Funds ` 1,00,000 ` 1,00,000 ` 1,00,000 ` 1,00,000 Investment Investment A comparison of Liquid ` 4,000 ` 4,000 ` 4,000 ` 4,000 Dividends in 6 months Dividends in 6 months funds with Arbitrage funds (-) Dividend Distribution (-) Dividend Distribution with dividend option ` 458 ` 1,119 ` 458 ` 1,332 Tax Tax throws up interesting ` 3,542 ` 2,881 ` 3,542 ` 2,668 return factors from a Net Tax Return Net Tax Return taxation perspective. Return (Annualized) 7.08% 5.76% Return (Annualized) 7.08% 5.34% Particulars Arbitrage Fund Liquid Funds Particulars Arbitrage Fund Liquid Funds ` 1,00,000 ` 1,00,000 ` 1,00,000 ` 1,00,000 Investment Investment ` 4,000 ` 4,000 ` 4,000 ` 4,000 Return over 6 months Return over 6 months Same is the case with (-) Short Term Capital (-) Short Term Capital ` 718 ` 1,435 ` 699 ` 1,398 the growth option Gains Tax Gains Tax ` 3,282 ` 2,565 ` 3,301 ` 2,602 Net Tax Return Net Tax Return Return (Annualized) 6.56% 5.13% Return (Annualized) 6.60% 5.20% Source: Internal data computation The above simulation is based on highest tax rates applicable to Individual/HUF/Domestic Companies as per Finance Act 2019, for illustrative purposes only and should not be construed as a promise on minimum returns and safeguard of capital. In view of individual nature of the tax consequences, each investor is advised to consult his/her own professional tax advisor. The AMC / Mutual Fund is not guaranteeing or promising or forecasting any returns. These products are not strictly comparable. There is no assurance or guarantee to unit holders as to rate/quantum of dividend distribution nor that the dividends will be paid regularly. 6
Equity Taxation – What works for Arbitrage? For Resident Individuals/HUF $ Liquid Funds/ Taxes Applicable Arbitrage Funds Debt Funds Dividend Distribution Tax 11.648% 29.120% Short Term Capital Gains@ 17.94%/17.16% 35.88%/34.32% Long Term Capital Gains@@ 11.96%/11.44% # 23.92%/22.88%* @ Short Term Capital gains will be considered for equity assets held for a period of up to 12 months and up to 36 months in case of debt assets @@ Assets not falling under short term assets will be treated as long term assets. * After providing Indexation $- Surcharge at 15%, is applicable where income of Individual, HUF, AOP, BOI, Artificial juridical person being unit holders exceeds Rs. 1 crore. As per Finance Act, 2019, surcharge at 10% is to be levied in case of Individual, HUF, AOP, BOI, Artificial juridical person being unit holders where income of such unit holders exceeds Rs. 50 lakhs but does not exceed Rs. 1 crore. #Exemption granted w.r.t. equity oriented fund u/s 10(38) of the income tax act is proposed to be withdrawn and tax at 10% (without indexation) will be charged on capital gain exceeding Rs. 1 lakh provided that transfer of such units is subject to STT. - Assuming the investor falls into highest tax bracket. The information set out is neither a complete disclosure of every material fact of Income-tax Act 1961 nor does it constitute tax or legal advice. In view of the individual nature of the tax consequences, each investor is advised to consult his/her own professional tax advisor. 7
Equity Taxation – What works for Arbitrage? For Domestic Companies $ Liquid Funds/ Taxes Applicable Arbitrage Funds Debt Funds Dividend Distribution Tax 11.648% 34.944% 34.944%/33.384% Short Term Capital Gains@ 17.472%/16.692% 29.120%/27.820%^ Long Term Capital Gains@@ 11.648%/11.128% # 23.296%/22.256% * @ Short Term Capital gains will be considered for equity assets held for a period of up to 12 months and up to 36 months in case of debt assets @@ Assets not falling under short term assets will be treated as long term assets. * After providing Indexation $- Surcharge at the rate of 7% is levied for domestic corporate unit holders where the income exceeds Rs 1 crore but is less than Rs 10 crores and at the rate of 12%, where income exceeds Rs 10 crores. ^ - If total turnover or Gross receipts during the financial year 2017-18 does not exceed Rs. 250 crores. #Exemption granted w.r.t. equity oriented fund u/s 10(38) of the income tax act is proposed to be withdrawn and tax at 10% (without indexation) will be charged on capital gain exceeding Rs. 1 lakh provided that transfer of such units is subject to STT. The information set out is neither a complete disclosure of every material fact of Income-tax Act 1961 nor does it constitute tax or legal advice. In view of the individual nature of the tax consequences, each investor is advised to consult his/her own professional tax advisor. 8
Fund Suitability Completely hedged positions enables investors to earn the spread between the spot and future markets, indifferent to market movements Tax efficiency of an equity oriented scheme. For those who do not want any directional exposure Ideal investment horizon 3 – 6 months . In view of the individual circumstances and risk profile, each investor is advised to consult his / her professional advisor before making a decision to invest in this scheme. 9
Portfolio Facts & Composition Cash, Cash Equivalent and Net Current Assets 4% Credit Exposure 9% Particulars Amount AUM 3,390.77 Cr. Fixed Deposit 19% Outstanding Derivative 2,316.43 Cr. Exposure Hedged Equity 68% Data as on April 30 th 2019. For Complete portfolio details please refer to the fund website www.hdfcfund.com. 10
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