I had in my earlier post written about an arbitrage that didn’t work out ( Dabur Pharma) as I had thought it through. Listing down one that did go right.
Arbitrage opportunities tend to get thrown up around panic selloffs. Around the third week of Jan markets corrected significantly from the highs of the 20,000 peak to around the 16500 – 17500 range.
I encountered this arbitrage opportunity around that time. ICICI Pru had a Fixed Maturity Plan listed on the BSE with a 18 month tenure. The tenure for the plan comes to a closure in the month of November 08. It was a pure play debt product with no exposure to the equity markets and would give a annualised return of 8-9% for investors like most FMP’s would.
It had a NAV of around 10.6 at that time and it was trading in the 9.22-9.23 range on the BSE. It was clearly additional return available at virtually no risk. Though it is relatively illiquid managed to buy some position in it.
I exited my position last week in the 11.02-11.03 range managing a absolute return of 19% and annualised return of 25% post brokerage. The NAV has gone up to Rs11.2 but I choose to exit early and not wait for redemption to avoid higher taxation rates. The markets in the meantime have gone down by about 14% in the same time frame.
The importance in such a transaction is to have patience and be comfortable with seeing NAV rise at a supersonic speed of Rs 0.02 every week :-) and wait for the gap between the market price and intrinsic value narrowing down.
Arbitrage opportunities tend to get thrown up around panic selloffs. Around the third week of Jan markets corrected significantly from the highs of the 20,000 peak to around the 16500 – 17500 range.
I encountered this arbitrage opportunity around that time. ICICI Pru had a Fixed Maturity Plan listed on the BSE with a 18 month tenure. The tenure for the plan comes to a closure in the month of November 08. It was a pure play debt product with no exposure to the equity markets and would give a annualised return of 8-9% for investors like most FMP’s would.
It had a NAV of around 10.6 at that time and it was trading in the 9.22-9.23 range on the BSE. It was clearly additional return available at virtually no risk. Though it is relatively illiquid managed to buy some position in it.
I exited my position last week in the 11.02-11.03 range managing a absolute return of 19% and annualised return of 25% post brokerage. The NAV has gone up to Rs11.2 but I choose to exit early and not wait for redemption to avoid higher taxation rates. The markets in the meantime have gone down by about 14% in the same time frame.
The importance in such a transaction is to have patience and be comfortable with seeing NAV rise at a supersonic speed of Rs 0.02 every week :-) and wait for the gap between the market price and intrinsic value narrowing down.
It doesn’t appear “sexy and hot” as the next potential ten bagger but I like opportunities like these.
4 comments:
Hi ninad
I have not read on FMP ..so FMP have floating rate characteristics ?
if yes, then some of the gains could also be due to the increase in the interest rate ?
great pick though
regards
rohit
Hi Rohit
FMP's are fixed maturity plans with a predefined tenure. In this case it was 18 months. A FMP is a substitute for fixed deposit but more tax efficient. Typically it will tend to have fixed tenured instruments with a fixed interest rate. A fund manager could however choose to have floating rate instruments.
The gain in the Nav was in sync with the way the NAV debt fund would grow in tenure. The returns really came bcos a instrument with a nav of 10.3 was available at 9.22. That was a huge discount without any risk.
Cheers
Ninad
Hi Ninad,
how did you come up with NAV of 10.3?
thank you
Kiran
Hi Kiran
I went back and checked my data the NAV was around the 10.6 mark around that time. The deal was even better :-). Will rectify it in the blog.
The NAV data is available on AMFI site and the ICICI Pru site.
Cheers
Ninad
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