HDFC Arb rbit itrage Fund (An (An op open en ended sche scheme - - PowerPoint PPT Presentation

July 2020

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HDFC Arb rbit itrage Fund

(An (An op

• pen en

ended sche scheme in invest sting in in ar arbitrage op

• pportunities)

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.

An In Income Generatin ing Equit ity In Inve vestment

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)

HDFC Mutual Fund/AMC is not guaranteeing returns on investments made in this scheme. The example ignores all transaction related costs.

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Capturing The Difference between Future & Spot

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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.

Arbitrage trade is unwound at parity

Product Rationale & Positioning

• Generate income through arbitrage opportunities arising
• ut of pricing mismatch in a security between different

markets or as a result of special situations.

• Completely

hedged positions, neutralizes market risk (volatility) and targets absolute returns irrespective of market conditions.

• Enhance portfolio returns using different trading strategies

within derivatives segment

• Balance of safety, returns and liquidity

Risk 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. Overnight Funds Liquid Funds

HDFC Arbitrage Fund

HDFC Ultra Short Term Fund Short Term Debt Funds Medium Term Debt Funds Long Term Debt Funds

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Investment Strategy

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• 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

• n the investment strategy investors should refer to the Scheme Information Document available on website www.hdfcfund.com.

Why Arbitrage funds?

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A comparison of Liquid funds with Arbitrage funds with growth

• ption

throws up interesting return factors from a taxation perspective.

Particulars Arbitrage Fund Liquid Funds Investment `1,00,000 ` 1,00,000 Return over 6 months ` 3,000 ` 3,000 (-) Short Term Capital Gains Tax ` 538 ` 1,282 Net Tax Return ` 2,462 ` 1,718 Return (Annualized) 4.92% 3.44%

Source: Internal data computation The above simulation is based on highest tax rates applicable to Individual/HUF/Domestic Companies as per the Finance Act, 2020 , for illustrative purposes only and should not be construed as a promise on minimum returns and safeguard of capital. It is assumed that the domestic company shall not opt for provisions of sec 115BAA. 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.

For Individual/HUF For Domestic Companies

Particulars Arbitrage Fund Liquid Funds Investment `1,00,000 ` 1,00,000 Return over 6 months ` 3,000 ` 3,000 (-) Short Term Capital Gains Tax ` 524 ` 1,048 Net Tax Return ` 2,476 ` 1,952 Return (Annualized) 4.95% 3.90%

Equity Taxation – What works for Arbitrage?

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For Resident Individuals/HUF$

& The Finance Act, 2020 has abolished the levy of dividend distribution tax (DDT) payable by domestic companies / mutual funds w.e.f. April 1, 2020. Consequently, old regime of taxation of dividend in the hands of shareholders / unitholders shall be revived. Also, the levy of additional tax of 10% (plus applicable surcharge & health and education cess) on all resident tax payers, excluding domestic companies and other specified entities on dividend income of more than Rs.1,000,000 p.a. received from a domestic company or companies has been abolished. ! The Finance Act, 2020 inserted a new section 194K which provides for withholding tax of 10% on any income (excluding the income in the nature of capital gains) exceeding INR 5,000 in aggregate for the financial year in respect of units of mutual fund in case of residents. @ 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 for the purpose of TDS and advance tax as per First Schedule Part II and III of the Finance Act, 2020 for Individuals / HUF # Long-term capital gain exceeding Rs. 1 lakh shall be taxable 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.

Taxes Applicable Arbitrage Funds Liquid Funds/ Debt Funds

Dividend Taxation& ! 30% + Surcharge as Applicable+4% Cess 42.744%/39%/35.88%/34.32% 30% + Surcharge as Applicable+4% Cess 42.744%/39%/35.88%/34.32% Short Term Capital Gains@ 15% + Surcharge as Applicable+4% Cess 17.94%/17.16% 30% + Surcharge as Applicable+4% Cess 42.744%/39%/35.88%/34.32% Long Term Capital Gains@@ 10% without Indexation + Surcharge as Applicable+4% Cess 11.96%/11.44%# 20% with Indexation + Surcharge as Applicable+4% Cess 28.496%/26%/23.92%/22.88%

Equity Taxation – What works for Arbitrage?

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For Domestic Companies$

& The Finance Act, 2020 has abolished the levy of dividend distribution tax (DDT) payable by domestic companies / mutual funds w.e.f. April 1, 2020. Consequently, old regime of taxation of dividend in the hands of shareholders / unitholders shall be

• revived. Also, the levy of additional tax of 10% (plus applicable surcharge & health and education cess) on all resident tax payers, excluding domestic companies and other specified entities on dividend income of more than Rs.1,000,000 p.a. received from a

domestic company or companies has been abolished. ! The Finance Act, 2020 inserted a new section 194K which provides for withholding tax of 10% on any income (excluding the income in the nature of capital gains) exceeding INR 5,000 in aggregate for the financial year in respect of units of mutual fund in case of residents @ 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 2018-19 does not exceed Rs. 400 crores. ^^ The corporate tax rates for domestic companies (not claiming specified incentives and deductions) at the rate of 22% under section 115BAA and domestic manufacturing companies (not claiming specified incentives and deductions) set-up and registered

• n or after 1 October 2019 at the rate of 15% under section 115BAB. The tax computed in case of domestic companies whose income is chargeable to tax under section 115BAA or section 115BAB shall be increased by a surcharge at the rate of 10%.
• Domestic companies may be subject to minimum alternate tax which is not specified in above tax rates. Not applicable in case domestic company has opted for sec 115BAA or 115BAB

# Long-term capital gain exceeding Rs. 1 lakh shall be taxable 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.

Taxes Applicable Arbitrage Funds Liquid Funds/ Debt Funds

Dividend Taxation & ! 30% + Appl.SC $ + 4% Cess - 34.944%/33.384% ^25% + Appl.SC $ + 4% Cess - 29.120%/27.820% ^^22%+10% SC +4% Cess - 25.17% ^^15%+10% SC +4% Cess - 17.16% 30% + Appl.SC $ + 4% Cess - 34.944%/33.384% ^25% + Appl.SC $ + 4% Cess - 29.120%/27.820% ^^22%+10% SC +4% Cess - 25.17% ^^15%+10% SC +4% Cess - 17.16% Short Term Capital Gains@ 15% without Indexation + Surcharge as Applicable+4% Cess 17.472%/16.692% 30% + Appl.SC $ + 4% Cess - 34.944%/33.384% ^25% + Appl.SC $ + 4% Cess - 29.120%/27.820% ^^22%+10% SC +4% Cess - 25.17% ^^15%+10% SC +4% Cess - 17.16% Long Term Capital Gains@@ 10% without Indexation + Surcharge as Applicable+4% Cess $ 11.648%/11.128%# 20% with Indexation + Surcharge as Applicable+4% Cess $ 23.296%/22.256%

Fund Suitability

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• 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.

Portfolio Facts & Composition

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Particulars Amount AUM 5,906.39 Cr. Outstanding Derivative Exposure 3,993.26 Cr.

Data as on June 30th 2020. For Complete portfolio details please refer to the fund website www.hdfcfund.com.

Hedged Equity 68% Fixed Deposit 24% Credit Exposure 5% Cash Margins, Cash Equivalent and Net Current Assets 3%

Product Features

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Type of Scheme An open ended scheme investing in arbitrage opportunities Inception Date (Date of allotment) October 23, 2007 Investment Objective To generate income through arbitrage opportunities and debt & money market instruments. There is no assurance that the investment

• bjective of the Scheme will be realized.

Fund Manager $

• Mr. Krishan Kumar Daga

Plans Direct Plan, Regular Plan (Wholesale) Sub-Options (i) Growth Option and (ii) Dividend Option Dividend Option offers Monthly Dividend Option and Normal Dividend Option with Payout and Reinvestment facility. Minimum Application Amount (Under Each Plan/Option) Purchase / Additional Purchase: Rs. 1,00,000 and any amount thereafter. Load Structure 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:

• 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

• f 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 (Total Returns Index) $ Dedicated Fund Manager for Overseas Investments: Mr. chirag Dagli

Asset Allocation Pattern

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Under normal circumstances, the asset allocation of the scheme’s portfolio will be as follows:

Types of Instruments Minimum Allocation (% of Total Assets) Maximum Allocation (% of Total Assets) Risk Profile Equity and Equity related instruments 65 90 Medium to High Derivative including index futures, stock futures Index Options and Stock Options etc 65 90 Medium to High Other derivative opportunities 20 Medium to High Debt Securities (including securitised debt) and money market instruments 10 35 Low to Medium Units issued by REITs and InvITs 10 Medium to High Non-convertible preference shares 10 Low to Medium

For further details, refer SID, KIM available on website www.hdfcfund.com and at Investor Service Centres (ISCs) of HDFC Mutual Fund Contd…

Asset Allocation Pattern … (contd. From previous page)

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In defensive circumstances the asset allocation will be as per the below table:

Types of Instruments Minimum Allocation (% of Total Assets) Maximum Allocation (% of Total Assets) Risk Profile Equity and Equity related instruments 65 Medium to High Derivative including index futures, stock futures Index Options and Stock Options etc 65 Medium to High Other derivative opportunities 20 Medium to High Debt Securities (including securitised debt) and money market instruments 35 100 Low to Medium Units issued by REITs and InvITs 10 Medium to High Non-convertible preference shares 10 Low to Medium

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 a maximum 35% of the total assets in foreign securities and up to 100% of its total assets in derivatives. For further details, refer SID, KIM available on website www.hdfcfund.com and at Investor Service Centres (ISCs) of HDFC Mutual Fund

Disclaimer & Risk Factors

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This presentation, dated 15th July 2020, 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 document is given in summary form and does not purport to be complete. The document does not have regard to specific investment

• bjectives, 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

• r 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.