BNP Paribas Enhanced Arbitrage Fund – NFO Review

BNP Paribas Enhanced Arbitrage Fund – NFO Review

Review by PersonalFN Research

An open ended equity scheme which will seek to generate income and capital appreciation by investing in equity & equity related instruments, including use of equity derivatives strategies and arbitrage opportunities with exposure in debt and fixed income instruments.

An Open ended equity Scheme
Benchmark Index
CRISIL Liquid Fund Index
Minimum investment
-Lump sum Rs . 5,000
Systematic Investment Plan (SIP)  - Rs. 500

·         Regular
·         Direct
·         Growth*
·         Dividend
o    Dividend Payout
o    Dividend Reinvestment
*default option
Face Value
Rs. 10 per unit
Expense Ratio
Maximum total expense ratio (TER):
Upto 2.50%*
Addl. expenses under regulation 52(6A)(c):
Upto 0.20%
Additional expenses for gross new inflows from specified cities:
Upto 0.30%
Entry Load
Exit Load
0.25%, if redeemed or switched-out upto 3 months from the date of allotment of units. Nil, if redeemed or switched-out after 3 months from the date of allotment of units.
Issue Opens
December 0, 2016
Issue Closes:
December 22, 2016

Investment Objective*

The primary investment objective of the scheme is to generate income and capital appreciation by investing in a combination of diversified portfolio of equity and equity related instruments, including use of equity derivatives strategies and arbitrage opportunities with exposure in debt & fixed income instruments.

However, there can be no assurance that the investment objectives of the Scheme will be realised. The Scheme does not guarantee or / indicate any returns.

Is this fund for you?
Arbitrage schemes are often compared to liquid schemes, because the returns are similar and the arbitrage funds are not exposed to the high risk of equities since the positions are completely hedged. However, this is not the case with BNP Paribas Enhanced Arbitrage Fund (BPEAF).
Being an "Enhanced Arbitrage" or "Arbitrage Plus" scheme, BPEAF aims to earn a higher return through unhedged equity exposure; which here is 10% of the total asset of the fund. So, you need to be wary of the risk associated with such schemes.

BPEAF is mandated to invest 65% to 90% of the portfolio towards arbitrage strategies. While the risk is low, due to fully hedged positions, you should be aware that arbitrage opportunities do not always exist.
The success of arbitrage strategies depends on the markets conditions, risk-free rate of return and the access to low latency trading (which executes trades at faster speeds).
The first two, are beyond the control of the fund manager. Though the risk may be low, the returns may not be consistent.

Hence, if you are a conservative investor, you should strictly avoid such schemes. The suitability of BPEAF angled towards investors with a moderate-to-high appetite for risk appetite and a investment horizon of three years or more.
Remember, while a pure arbitrage scheme is ideal for short-term period of one to three years, as the risk is low; the same investment horizon may not augur well with enhanced arbitrage funds.
Thus, if you are investing for short-term goals, you should not take undue risk of investing in unhedged equity.

As the fund will maintain an allocation of over 65% to equity, the long-term capital gains will be tax-free on units held above a year. Short-term capital gains will be taxed at 15% (excluding surcharge and cess).
How will the fund allocate its assets?

Under normal circumstances, the asset allocation pattern followed by the fund will be as under:

Indicative allocations
(% of total assets)
Risk Profile
Equities and equity related instruments (unhedged)*
Medium to High
Equities, equity related instruments and derivatives including index futures, stock futures, index options, & stock options, etc. as partly hedged / arbitrage exposure*
Medium to High
Debt Securities and Money market instruments with maturity upto 91 days only and/or units of liquid fund$
Low to Medium
* Equity allocation is measured as the gross exposure to equities, equity related instruments and derivatives. The Scheme will enter into derivatives transactions for arbitrage/partial hedging. The derivative positions will be hedged against corresponding positions in either equity or derivative markets depending on the strategies involved.

On the total portfolio level the Scheme does not intend to take a net short exposure to equity markets. Unhedged positions in the portfolio (investments in equity shares without corresponding exposure to equity derivative) shall not exceed 10% of the net assets. $ Debt instruments may include securitized debt up to 10% of the net assets. Includes investments in derivatives.
Further, the offer document states that:
·         The cumulative gross exposure through debt and money market instruments, equity & equity related instruments, and derivative instruments will not exceed 100% of the net assets of the scheme
·         The scheme will not invest in foreign equities including ADR/GDR and foreign debt securities including foreign securitised debt.
·         The scheme will not indulge in short selling and securities lending and borrowing.
·         The Scheme will not participate in Credit Default Swaps (CDS) for Corporate Bonds.
·         The Scheme may enter into repos/reverse repos as may be permitted by RBI other than repo in corporate debt securities. A part of the net assets may be invested in the Collateralised Borrowing & Lending Obligations (CBLO) or repo or in an alternative investment as may be provided by RBI.
·         The scheme shall rebalance the portfolio in case of any deviation to the asset allocation. Such rebalancing shall be done within 30 days from the date of occurrence of deviation.

What investment strategies will the fund follow?
In the endeavor to provide long-term capital growth from a diversified and actively managed portfolio of equity and equity related securities, the scheme would be managed actively with an aim to manage the risk and thereby improve risk adjusted returns through diversification across these instruments and asset classes.

For equity allocation..!

The scheme will follow a bottom-up approach for stock picking, choosing companies across sectors. The fund manager will primarily focus on companies that have demonstrated characteristics such as market leadership, strong financials and quality management, and which have the potential to create wealth for their shareholders through the ups and downs of the market.

For derivatives..!

A dominant part of the portfolio will be managed using arbitrage strategies by taking advantage from the price prevailing for stock / index in various market segments. The scheme will seek to reduce volatility of returns by actively using derivatives as hedge.
The fund manager will buy a stock where it is available cheap and sell the stock where it is quoting at a higher price. Simultaneous buy and sell trade will be entered into in both the market segments (Cash & Futures), by identifying the gains at the time of execution. On expiry of the futures contract, there is a convergence of price of a stock in cash and derivatives segment.
Gains are assured irrespective of the market movements on expiry of the futures contract. Similarly, the fund manager will capitalise on mispricing opportunities through corporate actions or event driven strategies.

For debt allocation..!

The scheme will additionally invest in money market instruments with maturity up to 91 days to generate returns.
The scheme will invest in debt and money market instruments including bonds, debentures, treasury bills, commercial paper of public sector undertakings and private sector corporate entities, reverse repurchase obligation in government securities and treasury bills.

Funds Manager Profile..!
Mr. Karthikraj Lakshmanan (Senior Fund Manager – Equity)..!
 He has an overall experience of over 10 years. ,Mr lakshmanan been associated with BNP Paribas for nearly eight years, with bulk of his experience as a portfolio manager in the Portfolio Management Service (PMS) segment.
In October 2016, Mr Lakshmanan was designated as Sr. Fund Manager in the mutual fund division. He is a commerce graduate (B.Com) with a Post Graduate Diploma in Business Management (PGDBM) from SP Jain Institute of Management, Mumbai. Besides, he's also a Chartered Accountant (CA) by qualification and has completed CFA Level 3.

Mr. Mayank Prakash (Fund Manager)..!
 He has a total experience of 9 years, including 6 years as a fund manager. Mr Prakash earlier managed funds of Kotak Mahindra Mutual Fund, before switching to BNP Paribas MF in August 2015.
He too is a Chartered Accountant by qualification (CA) and has to his credit a MBA from Kanpur University.

Fund Outlook
BPEAF will aim to exploit arbitrage opportunities existing in the market. Volatile market conditions create several such opportunities for fund managers. With domestic and global uncertainty, the market will be dotted with volatility in the months to come.
 However, it depends on the capability of the fund management team to identify and convert such mispricing into gains. But, there is no guarantee that there will always be arbitrage opportunities available.

As BPEAF has the flexibility to increase its unhedged equity exposure to 10%, it invites high risk. A fund manager in such a case has to be diligent in his stock picking and pick low beta stocks.
If not, the volatility of the unhedged positions may create a drag on the portfolio returns.

While investing in debt is relatively safe, the returns can be volatile at times. However, as the BPEAF will remain invested in securities with a maturity period of up to 91 days, the volatility will be low.
Going forward, based on cues from domestic and global markets and with lowering inflation, the RBI may consider reducing rates in 2017. Hence, you may have to settle with lower returns going forward, if rates head downwards.


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