Investments in arbitrage funds declined by 80 percent in August. However, investment in other hybrid mutual funds increased during this period. According to industry data, only Rs 2,372 crore investment came into arbitrage funds in August. Arbitrage fund also comes in the category of hybrid fund. Till August this year, around Rs 65,000 crore has been invested in arbitrage mutual funds. Does the decline in investment in August mean that the attractiveness of this fund is decreasing?
What is Arbitrage Fund?
First Arbitrage Fund (Arbitrage FundIt is important to understand the meaning of ). Arbitrage funds buy shares in the cash market and sell them in the futures market at the same time. On expiry they reverse their position. The difference between the two prices is their profit. Over the long term, the returns of such funds are generally equal to the yields of money market instruments.
What are the tax rules for arbitrage funds?
Experts say that the government’s increase in tax on Short Term Capital Gains (STCG) has had an impact on arbitrage funds. In the budget presented in July, the government increased the tax on short-term capital gains on shares and equity mutual funds from 15 percent to 20 percent. From tax point of view, arbitrage funds fall in the category of equity funds because they invest 65 percent of their assets in stocks. These provide higher returns than the interest on savings accounts of banks.
Has the change in tax rules had any impact?
Pankaj Shrestha, head of investment services at Prabhudas Lilladher Capital, said, “The increase in tax on short-term capital gains from shares in the Union Budget has reduced the attractiveness of arbitrage funds. This is because the gap between debt and equity funds from tax perspective has increased. The difference has decreased.” Vishal Dhawan, Founder and CEO of Plan Ahead Advisors, says that it remains to be seen how much impact the changes in tax rules will have on arbitrage funds. But, in terms of tax, this category is better than debt funds. Capital gains on debt mutual funds are taxed as per the tax slab of the investor. The holding period does not affect this.
What is the average return?
Currently there are 28 arbitrage funds in the market. The average return of funds in this category has been 7.36 percent in the last one year. This information is based on data from Value Research. Kotak Equity Arbitrage Fund has given the highest return in one year (as on September 10, 2024), while Mahindra Manulife Arbitrage Fund has given the lowest return. Experts say that the decisions of the US Central Bank Federal Reserve and Bank of Japan regarding interest rates will impact the returns of arbitrage funds.
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Should you invest?
Experts say that if interest rates are reduced further, the returns of arbitrage funds will reduce. Vishal Dhawan of Plan Ahead Wealth Edelweisers said, “Despite this, arbitrage funds are better than debt funds from tax point of view. But for this, the investment in this fund will have to be maintained for a good period. Arbitrage for investors falling in high tax slabs. “The fund will remain an attractive option.”