Business News Desk, Investment in arbitrage funds fell 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 was invested in arbitrage funds in August. Arbitrage funds also fall under the category of hybrid funds. Till August this year, about Rs 65,000 crore has been invested in arbitrage mutual funds. Does the decrease in investment in August mean that the attraction of this fund is decreasing?
What are arbitrage funds?
First of all, it is important to understand the meaning of arbitrage fund. 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. In the long term, the returns of such funds are generally equal to the yield of instruments in the money market.
What are the tax rules for arbitrage funds?
Experts say that the government’s increase in tax on short term capital gains (STCG) has affected arbitrage funds. In the budget presented in July, the government increased the tax on short term capital gains of shares and equity mutual funds from 15 percent to 20 percent. In terms of tax, arbitrage funds come under the category of equity funds, because they invest 65 percent of their assets in shares. They give higher returns than the interest on bank savings accounts.
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 on shares in the Union Budget has reduced the attraction of arbitrage funds. This is because the difference between debt and equity funds in terms of tax has reduced.” Vishal Dhawan, Founder and CEO of Plan Ahead Advisors, says that it remains to be seen how much the change in tax rules will affect arbitrage funds. But, in terms of tax, this category is better than debt funds. Capital gains of debt mutual funds are taxed according to the investor’s tax slab. It is not affected by the holding period.
What is the average return?
There are currently 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 (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 the Bank of Japan regarding interest rates will affect the returns of arbitrage funds.
Should you invest?
Experts say that if interest rates are reduced further, the returns of arbitrage funds will decrease. Vishal Dhawan of Plan Ahead Wealth Advisers said, “Despite this, arbitrage funds are better than debt funds from a tax perspective. But for this, one has to maintain investment in this fund for a good period of time. Arbitrage funds will remain an attractive option for investors falling in the high tax slab.