Product FAQs1) What is an Arbitrage Fund?

An Arbitrage Fund is an equity-oriented mutual fund that generally seeks to invest at least 65% of its portfolio in equity arbitrage opportunities and the rest of its portfolio in debt and money market instruments. However, what makes an Arbitrage Fund unique is, unlike a typical equity fund, its exposure to equity arbitrage opportunities tends to insulate it from the vagaries of the equity markets and helps it generate a more stable and predictable outcome.

2) What is an Equity Arbitrage Opportunity?

Equity arbitrage opportunity is a process of identifying a gap between the price of a stock in the cash market and its corresponding price in the futures market. This gap exists for various reasons – time value of money, market participants' views on the future trajectory of the stock price, potential corporate action, etc. An equity arbitrage seeks to identify this spread and attempts to capture it in an efficient manner.

For example, in a typical bull market, stock prices in equity futures markets are generally

An open ended equity scheme that takes the advantage of

opportunities in the market by simultaneously buying in one market

(either spot or derivatives) and selling in another.

EdelweissArbitrage Fund

Make price differencebetween markets work for you.

higher than prices in the cash markets due to factors like time value of money as well as lower capital requirements in the futures market. This situation creates an opportunity for an equity arbitrage. It involves buying a stock in the cash market and simultaneously selling the same in the same quantity in the futures market at a premium. Thus it captures the spread that exists between the cash market price and its futures market price.

Similarly, in cases where futures prices are trading at a discount to the cash price of a stock that the Arbitrage Fund already has, the Fund will seek to sell the stock at higher prices and buy its futures for the same quantity at a discount and thus seeks to capture the spread between the cash prices and their futures prices.

This gap tends to narrow as the expiry date of the futures contract (last Thursday of each month) comes closer and converges on the expiry dates. In such situations, futures contracts are typically rolled over to the next month's futures contracts based on their relative attractiveness of the gap between the futures prices of the expiring contract and the futures prices of the new contracts on that day.

3) Can you give an example of an equity arbitrage opportunity?

Example – 1 Fresh Arbitrage & Roll-over Reliance Industries Limited

Please note that stock name mentioned above is only for illustration purpose. Edelweiss Arbitrage Fund may or may not hold the same in its portfolio. Please note that past performance may or may not sustain in future.

Example – 2 Fresh Arbitrage & Unwinding of positions ITC Limited

Date Cash Price Dec 2017 Spread in % Ann Remarks

on NSE Futures Rs. Yield

Nov 30, 2017 921.55 927.75 6.20 8.77% Buy RIL stock in cash & sell Dec 17 futures & capture 8.77% pa spread

Date Dec 2017 Jan 2018 Spread in % Ann Remarks

Futures Futures Rs. Yield

Dec 28, 2017 924.20 929.00 4.80 6.77% Rollover Dec 17 futures to (Expiry Date) Jan 2018 futures & capture 6.77% pa spread

Source: Bloomberg

Date Cash Price Jan 2018 Spread in % Ann Remarks

on NSE Futures Rs. Yield

Dec 28, 2017 261.85 263.20 1.35 6.72% Buy ITC stock in cash & sell (Expiry Date) Jan 18 futures & capture 6.72% pa spread

Please note that stock name mentioned above is only for illustration purpose. Edelweiss Arbitrage Fund may or may not hold the same in its portfolio. Please note that past performance may or may not sustain in future.

4) That sounds simple. What are the risks involved in a typical Arbitrage Fund?

Arbitrage Funds generally trade simultaneously in the cash markets and the futures markets of the same stock for the same quantity. These trades are settled on the Stock Exchanges. Arbitrage Funds are also required to maintain their margin requirements through interest-bearing deposits of approved Scheduled Commercial Banks. Based on this, an Arbitrage Fund is predominantly exposed to the settlement risk of the Stock Exchanges as well as the financial strengths of banks whose deposits were used for margin requirements. Apart from this, an Arbitrage Fund's exposure to other asset classes could add to risks commensurate with the exposure of its underlying assets.

5) Apart from Arbitrage Opportunities and Margin Fixed Deposits, where else can they

invest?

Arbitrage Funds tend to maintain at least 65% exposure to equity arbitrage opportunities. The rest of the portfolio could be invested in the eligible equities and debt and money market instruments.

The following table compares the investment universe of Edelweiss Arbitrage Fund with some of its peers as on December 29, 2017:

*Please note that these fund under the Arbitrage Category has the provision in the respective Scheme Information Document to take directional call.

Date Cash Price Jan 2018 Spread in % Ann Remarks

on NSE Futures Rs. Yield

Jan 19, 2018 274.55 274.10 0.35 7.75% Sell ITC stock in cash & buy Jan 18 futures & capture 7.75% pa spread

Source: Bloomberg

Asset Type Other Arbitrage FundsEdelweiss Arbitrage Fund

Arbitrage Opportunities Yes Yes

Margin Fixed Deposits Yes Yes

Out-right Equity Exposures No Yes*

Government Bonds No Yes

Duration Risk Lower Lower to Higher

Credit Risk Lower Lower to Higher

Equity IPO No Yes*

Source: Bloomberg

6) What benchmark is being used by Arbitrage Funds? How is the performance of the

benchmark?

Arbitrage Funds typically compare their relative performance against the NIFTY 50 Arbitrage Index. This index tends to capture the spread between the cash price and the near-month futures price of NIFTY 50 stocks. The index has 65% allocation to NIFTY 50 Index Futures, 30% to 1M MIBOR and 5% cash.

7) How is the relative performance of Edelweiss Arbitrage Fund as compared to its

benchmark?

Edelweiss Arbitrage Fund – Direct Growth Plan has consistently outperformed its benchmark of NIFTY 50 Arbitrage Index due to its disciplined approach to investments, superior execution and exposure to high quality short-term fixed income assets. The Fund has maintained its philosophy of being “True-to-Label”. We believe that our disciplined approach to investments, superior execution skills and focus on costs have helped us generate consistently superior & top quartile performance in the last three years. Performance as on January 31, 2019 is stated below:

Past performance may or may not be sustained in future and should not be used as a basis for comparison with other investments.

* CAGR Return.

1. Different plans shall have different expense structure. Returns provided above are or direct and regular plan for Growth Option only. Since Inception returns are calculated on Rs.10/- invested at inception of the scheme. In case the start/end date is non business day, the NAV of previous day is used for computation.

2. The scheme is currently managed by Mr. Bhavesh Jain (managing this fund from June 27, 2014) and Mr. Dhawal Dalal (Managing this fund from December 22, 2016). Please refer http://edelweissmf.com/Download/factsheet.aspx for other schemes currently managed by the Fund Managers and relevant scheme for performance.

3 Since the scheme is in existence for more than 3 year but less than 5 years hence performance data for 5 years and more is not provided.

4. $ Nifty 50 Arbitrage TR Index is not available on NSE Website

As on Dec 29, 2017 1Y Return 2Y Returns 3Y Returns

NIFTY 50 Arbitrage Index 4.85% pa 7.12% pa 7.24% pa

Source: ACE MF

Regular Plan Direct Plan Scheme Benchmark (Additional

(Nifty 50 Arbitrage Benchmark)

Index) Nifty 50 TR Index

Period Return Value Return Value Return Value Return Value

(INR)$ (INR)$ (INR)$ (INR)$

1 Year 6.06% 10,610 6.75% 10,679 4.43% 10,446 4.61% 10,464

3 Year 6.19% 11,977 6.88% 12,213 5.11% 11,613 12.47% 14,230

5 Year NA NA NA NA NA NA NA NA

Since Inception 6.89% 13,510 7.47% 13,847 6.02% 13,021 9.89% 15,306(CAGR)

8) What is the total size of the Arbitrage Fund universe? What is the market share of

Edelweiss Arbitrage Fund?

Arbitrage Funds have been attracting investments due to their simplicity and superior tax-adjusted returns. The following table highlights the growing popularity of Arbitrage Funds and Edelweiss Arbitrage Fund's improving market share:

9) What factors are contributing to the performance of an Arbitrage Fund?

There are several factors contributing to the performance of an Arbitrage Fund. Some important factors are:

Sentiment of equity market participants – better sentiment means higher potential •returns for equity arbitrage opportunities

Interest rates in the economy – higher bond yield tend to impact Arbitrage Fund returns •positively generally

Open interest in the Equity Derivative Markets – higher Open Interests means higher level •of activities and therefore potential for better returns

FX hedging costs – higher cost of hedging reduces relative attractiveness of equity •arbitrages for FIIs and thus improving potential returns for domestic Arbitrage Funds

Relative size of the Arbitrage Industry – A growing size tends to reduce arbitrage •opportunities

10) What is the tax treatment on gains of Arbitrage Funds?

Arbitrage Funds – being equity-oriented funds enjoy tax treatments of equity funds. The following table compares the tax treatment on returns of Arbitrage Funds with fixed income funds:

(Rs. Cr) March 2016 December 2018 December 2017

Industry AUM 25,106 57,356 59,550

Edelweiss Arbitrage Fund AUM 872 2,978 5,739

Market Share 3.5% 5.4% 9.6%

Source: AMFI

Fixed Income FundsArbitrage Funds

Dividend Distribution Tax* 10% + Surcharge + Cess 30% + Surcharge + Cess

ST Capital Gains Tax 15% At marginal tax rate

LT Capital Gains Tax 10% after 1Y 20% with indexation benefits after 3Y

Source: Budget Documents for FY19

*For Domestic Company

11) Can Arbitrage Funds generate negative returns on a given day? What are the draw-

down risks in the Arbitrage Funds??

Yes – Arbitrage Funds can experience a small fall in their NAVs. However, they tend to bounce back sooner due to the inherent safety mechanism in the form of matched positions in cash equities and their Futures contracts for at least arbitrage position of their portfolio. The following table captures the draw-down risks in NIFTY 50 Arbitrage Index as well as Edelweiss Arbitrage Fund in the last three years:

CY2017 CY2016 CY2015

# of times NIFTY 50 Arbitrage Index generated Negative returns on Rolling Weekly Basis 36 26 18

Max Draw-Down by NIFTY 50 Arbitrage Index -0.22% -0.37% -0.28%

# of times Edelweiss Arbitrage Fund generated Negative returns on Rolling Weekly Basis 0 9 8

Max Draw-Down by Edelweiss Arbitrage Fund -0.12% -0.23% -0.21%

# of Days to recover Max Draw-Down forEdelweiss Arbitrage Fund – DG 4 6 7

Source: ACE MF

Disclaimer: The document is dated January 30, 2018 and has been prepared by Edelweiss Asset Management Limited (Edelweiss 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 objectives, financial situation and the particular needs of any specific person who may receive this document. Sector(s) / Stock(s) / Issuer(s) mentioned above are for the purpose of explanation and should not be construed as recommendation. The fund manager(s) may or may not choose to hold the stock mentioned, from time to time. Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s). The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The same should not be construed as investment advice to any party. 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. Neither Edelweiss Asset Management Limited (Edelweiss AMC) and Edelweiss Mutual Fund (the Fund) nor any person connected with them, accepts any liability arising from the use of this document. Edelweiss Mutual Fund/AMC is not guaranteeing returns on investments made in this scheme. 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. Past performance may not be sustained in the future.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.