Before investing into mutual funds, investors often face a lot of dilemma of which schemes to opt for, and which ones to ignore. Although most retail investors prefer the schemes that fall in the popular categories of large caps, mid-caps, index funds, among others; a few happen to try their luck in unconventional schemes too.
One such category is arbitrage mutual funds which have witnessed an increase in inflow of funds in the past few months. Before we proceed further, let us explain what are arbitrage funds.
What are arbitrage mutual funds?
These are equity-oriented hybrid funds that earn their profits on account of price differential between different stock exchanges.
In other words, these mutual funds leverage the difference in prices of securities in different stock markets to earn their profits.
These schemes invest a minimum of 65 percent of assets in equity & equity-related instruments. Since they invest their assets in both equity and debt, they are treated like hybrid mutual funds.
Experts believe that these funds are attractive for short term investors.
“Arbitrage funds can turn out to be a good bet to park your money to meet short-term goals. Their main attraction is its taxation. They behave like debt mutual funds but are taxed like equity schemes. So those who are from the higher tax bracket stand to benefit. If you hold them for less than a year, you are supposed to pay 15 percent STCG tax and after a year, the rate of tax is 10 percent on the profits that too after ₹1 lakh limit. But one must note that they are more volatile as compared to debt funds,” says Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services.
Interestingly, these schemes have turned attractive recently with inflows outpacing their counterparts in the past several months.
In July, Arbitrage mutual funds received an inflow of ₹10,074 crore. During the same period, other schemes in the category of hybrid mutual funds received a lower inflow. For example, multi asset allocation funds received an inflow of ₹1,381 crore, dynamic asset allocation funds got ₹419 crore and conservative hybrid funds saw an inflow of ₹164 crore.
|Month||Inflows ( ₹crore)|
“One of the key reasons for higher inflows into arbitrage funds is that debt funds are not attractive anymore since they lost the indexation benefit on LTCG. So, investors are exploring other opportunities and some of them have found one in arbitrage funds. Moreover, markets have been quite volatile in the past few months, thus increasing the earning potential in arbitrage funds,” says Sridharan Sundaram, a Sebi-registered investment advisor and founder of Wallet Wealth.
And it is important to note that the figures of July were not an aberration. During the entire June quarter, inflow of funds into arbitrage mutual funds was highest vis-a-vis other categories among hybrid mutual funds.
Sample this: In June quarter, arbitrage funds got an inflow of ₹13,721 crore, whereas dynamic asset allocation funds saw an outflow of ₹1,042 crore, multi asset allocation funds saw an inflow of ₹2,506 crore and conservative hybrid funds saw an outflow of ₹71.30 crore.
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