HDFC Arbitrage Fund

(An open ended scheme investing in arbitrage opportunities)

W.e.f from May 23, 2018 the Fundamental attributes of the scheme has been changed. Please refer notice cum addendum
dated April 12, 2018

An Income Generating Equity Investment

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. May 2018
Table Of Contents
• Arbitrage – The Concept

• Product Rationale & Fund Positioning

• Investment Strategy

• Taxation

• Fund Suitability

• Portfolio Facts & Composition

• Scheme Features

• Asset Allocation

• Disclaimer & Risk Factors

2
 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 4)

HDFC Mutual Fund/AMC is not guaranteeing returns on investments made in this scheme. The example ignores all transaction related costs. 3
 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. 4
 HDFC Arbitrage Fund (“The Scheme”)
Product Rationale & Positioning

• Generate income through arbitrage

Risk
opportunities arising out of pricing
mismatch in a security between
different markets or as a result of
Long Term
special situations. Debt Funds
Medium
Term Debt
Short Term Funds
Debt Funds
• Completely hedged positions, HDFC
neutralizes market risk (volatility) and Liquid Funds Arbitrage
targets absolute returns irrespective Overnight Fund
Funds
of market conditions.

• Enhance portfolio returns using

different trading strategies within
derivatives segment

• Balance of safety, returns and Return

liquidity

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. 5
 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 and notice cum 6
addendum – dated April 12, 2018 available on www.hdfcfund.com.
 Why Arbitrage funds?
Particulars Arbitrage Fund Liquid Funds

Investment `1,00,000 `1,00,000

Dividends in 6 months `4,000 `4,000 A comparison of Liquid funds with Arbitrage funds
with dividend option throws up interesting return
(-) Dividend Distribution Tax `458 `1,119
factors from a taxation perspective.
Net Tax Return ` 3,542 `2,881

Return (Annualized) 7.08% 5.76%

Particulars Arbitrage Fund Liquid Funds

Investment `1,00,000 ` 1,00,000

Return over 6 months ` 4,000 ` 4,000

Same is the case with the growth option (-) Short Term Capital
` 718 ` 1,435
Gains Tax
Net Tax Return ` 3,282 ` 2,565

Return (Annualized) 6.56% 5.13%

Source: Internal data computation
The above simulation is based on highest tax rates applicable to Individual/HUF as per Finance Act 2018, 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 7
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.
 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.

$- 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,
2018, 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.

- 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.

8
 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.

$- 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 2016-17 does not exceed Rs. 250 crores.

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.

9
 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. 10
 Portfolio Facts & Composition

Cash, Cash
Equivalents
and Net
Current Assets
19%

Particulars Amount

AUM 4,138.77 Cr.

Outstanding Derivative
2,812.05 Cr. Credit
Exposure Exposure
13%

Hedged Equity
68%

Facts as on April 30th 2018. For Complete portfolio details please refer to the fund website www.hdfcfund.com. 11
 Scheme Features
Type of Scheme An open ended scheme investing in arbitrage opportunities
Inception Date
October 23, 2007
(Date of allotment)
To generate income through arbitrage opportunities and debt & money market instruments. There is no assurance that
Investment Objective
the investment objective of the Scheme will be realized.
Fund Manager $ Mr. Krishan Kumar Daga

Plans Direct Plan, Regular Plan

(i) Growth Option and

(ii) Dividend Option
Sub-Options
Dividend Option offers Monthly Dividend Option and Normal Dividend Option with Payout and Reinvestment
facility.
Minimum Application Amount
Wholesale Plan - Purchase / Additional Purchase: Rs. 1,00,000 and any amount thereafter.
(Under Each Plan/Option)
Entry Load:
• Not Applicable.
Upfront commission shall be paid directly by the investor to the ARN Holder (AMFI registered Distributor) based on the
investors’ assessment of various factors including the service rendered by the ARN Holder.

Exit Load:
Load Structure • In respect of each purchase / switch-in of units, an Exit Load of 0.25% is payable if Units are redeemed / switched-out
within 1 month from the date of allotment.
• No Exit Load is payable if Units are redeemed / switched-out after 1 month from the date of allotment.
In respect of Systematic Transactions such as SIP, Flex SIP, GSIP, STP, Flex STP, Swing STP, Flex index, Exit Load, if any,
prevailing on the date of registration / enrolment shall be levied. For further details on load structure, please refer to the
Scheme Information Document/Key information memorandum of the Scheme.
Benchmark Index NIFTY 50 Arbitrage Index
12
$ Dedicated Fund Manager for Overseas Investments: Mr. Rakesh Vyas
 Asset Allocation Table
Under normal circumstances, the asset allocation (% of net assets) of the Scheme’s portfolio will be as follows:

Minimum Allocation Maximum Allocation

Types of Instruments Risk Profile
(% of Total Assets) (% of Total Assets)

Equity and Equity related

65 90 Medium to High
instruments
Derivative including index
futures, stock futures Index
65 90 Medium to High
Options and Stock Options
etc
Other derivative
0 20 Medium to High
opportunities
Debt Securities (including
Low to Medium
securitised debt) and money 10 35
market instruments
Units issued by REITs and
0 10 Medium to High
InvITs
Non-convertible preference
0 10 Low to Medium
shares

For further details, refer SID, KIM and notice cum addendum dated April 12, 2018 available on www.hdfcfund.com and at Investor Service
Centres of HDFC Mutual Fund 13
Contd …
 Asset Allocation Table … (contd. From previous page)
In defensive circumstances the asset allocation will be as per the below table:

Minimum Allocation Maximum Allocation

Types of Instruments Risk Profile
(% of Total Assets) (% of Total Assets)

Equity and Equity related

0 65 Medium to High
instruments
Derivative including index
futures, stock futures Index
0 65 Medium to High
Options and Stock Options
etc
Other derivative
0 20 Medium to High
opportunities
Debt Securities (including
Low to Medium
securitised debt) and money 35 100
market instruments
Units issued by REITs and
0 10 Medium to High
InvITs
Non-convertible preference
0 10 Low to Medium
shares

The Scheme may invest in the schemes of Mutual Funds in accordance with the applicable extant SEBI (Mutual Funds) Regulations as amended
from time to time. The scheme may invest up to 35% in foreign securities and up to 100% in derivatives.
For further details, refer SID, KIM and notice cum addendum dated April 12, 2018 available on www.hdfcfund.com and at Investor Service
Centres of HDFC Mutual Fund
14
 Disclaimer & Risk Factors
This presentation, dated 24th May 2018, has been prepared by HDFC Asset Management Company Limited (HDFC AMC)
based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are
approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this
document is for general purposes only. The tax benefits set out herein are for general purposes only & don't constitute tax
advise. The details are based on prevailing tax laws/tax positions. Investors should be aware that the fiscal rules/tax laws
may change & there can be no guarantee that the current tax position may continue indefinitely. The document is given in
summary form and does not purport to be complete. The document does not have regard to specific investment objectives,
financial situation and the particular needs of any specific person who may receive this document. The information/ data
herein alone are not sufficient and should not be used for the development or implementation of an investment strategy.
The statements contained herein are based on our current views and involve known and unknown risks and uncertainties
that could cause actual results, performance or events to differ materially from those expressed or implied in such
statements. Past performance may or may not be sustained in future. Neither HDFC AMC and HDFC Mutual Fund nor any
person connected with them, accepts any liability arising from the use of this document. The recipient(s) before acting on
any information herein should make his/her/their own investigation and seek appropriate professional advice and shall
alone be fully responsible / liable for any decision taken on the basis of information contained herein.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS
CAREFULLY.

15
Thank You