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| Capitalstars Investment Advisor |
Arbitrage funds have received the highest inflows of Rs 27,958 crore during the first eleven months of this calendar year as high net worth investors stayed away from debt funds due to the credit crisis. Also, better taxation and lower returns from liquid funds drew investors to this category. As per data from Value Research, this category of mutual funds has generated a return of 5.82% over the last year.
“Investors believe arbitrage funds to be a safer bet in times of credit crisis,” says Radhika Gupta, CEO, EdelweissNSE -2.53 % Mutual Fund.
Ever since September 2018, investors have been worried about the happenings in the debt markets after a series of defaults from the likes of IL&FS and DHFL. In addition, many debt fund schemes marked down their investments incorporate where there was a rating downgrade leading to losses for investors. Given this scenario, many preferred to stay away from debt funds.
In comparison, arbitrage funds carry no credit or interest rate risk. They generate a return by simultaneously buy shares in the cash segment and sell futures in the derivatives segment of the same company as long as the futures are trading at a reasonable premium. The scheme does not take a naked exposure to any individual company or an index as each buy transaction in the cash market has a corresponding sell transaction in the futures market, thereby reducing risk. Hence many investors found this to be a safe place to park money with a time frame of three months to a year.
Another reason for investors shifting to this category is due to the 7-day exit load imposed on liquid funds and tightening of norms. “Lower returns from liquid funds and better post-tax returns have led investors to arbitrage funds,” says Abhishek Singhvi, Director, Trufid Investment Advisors. Returns from liquid funds slipped to 4-5% after the regulator made it mandatory for such schemes to hold 20% of the corpus in liquid assets like cash and government securities, driving the shift to arbitrage funds.
Wealth managers point out that tax advantage continues to be a draw too especially for HNIs. Since arbitrage funds maintain an average exposure of more than 65 percent to equity, they are treated as equity funds for taxation.
Investors need to pay a 15% tax if they sell before holding for one year and a 10% tax on capital gain if held for more than a year. Dividends from arbitrage funds attract a dividend distribution tax of 10%. As compared to this, in a debt fund an investor in the high tax bracket will have to pay 30%.
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