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Arbitrage Funds
Article was educating. Returns/performance is better than liquid funds and post tax is simply excellent. Only thing is, will these funds continue the same performance ?
I have been aggressively advising the category to my clients since 2012. The category consists of approx 20% of my AUM. You need to monitor the funds under the category every month. It is not buy an forget kind of a fund. My investors are happy with the returns as other debt funds went through bad times in June 2013. These funds have come into limelight only because of the NFO pipeline. Edelweiss and some other AMC is coming out with the an Arbitrage Fund. If huge amount comes under the category it will lead to dilution in the returns as more money will chase the same amount of opportunities. We as advisers need to track these funds and advice exit at the right time.
Arbitrage Funds can be the first baby step IFA can recommend to their investors to get into MF schemes who are in FDs ( instead of Liquid schemes) with better returns, safety & tax efficiency. However, one of the main reasons why this is not recommended over Liquid is the brokerage payouts in liquid (about 75 bps in retail) & in arbitrage (40-50 bps). Industry needs to retweak this and reverse this brokerage payouts in favour of arbitrage schemes. This structural change in payouts itself will make it more attractive for IFAs to prefer arbitrage over liquid with better returns potential for their investors.
If you are investor, who wants a Risk-free Tax efficient fund and are unsure of the markets in present condition, you can invest in Arbitrage Funds and do a STP into a Diversified Equity Fund. If your investment horizon is more than 1 year but less than 3 years, you can consider Arbitrage funds, but if your investment horizon is less than 1 year, you can look at Liquid/Debt funds. FINALLY, PLEASE NOTE, ARBITRAGE FUNDS ARE GOOD FOR SHORT TO SHORTISH MEDIUM TERM, THEY ARE GOOD AT PROTECTING YOUR MONEY BUT THEY DO NOT (I REPEAT, DO NOT) CREATE WEALTH. Arbitrage Funds is a risk mitigating tool. Every investor should have 1 Arbitrage Fund in his/her portfolio. Read the same in my article. http://goodfundsadvisor.blogspot.in/2014/06/gaining-from-equity-volatility.html
I would like to submit one data point of IDFC pure arbitrage fund. It has generated mere 3.5% return for the period Nov,2008 to July,2010. So it cant be taken for granted that this fund is by default better then Liquid or Short term funds. There may be instances when it can give much lesser return then your savings account.
Sir; IT dept disallows propotion of expense if you are generatting tax free return. Will there be same case in debt liquid fund. Pl throw some more light on the same...
@ Dhiraj Mittal. The income by way of long-term capital gains of a company would be taken into account in computing the book profits and Minimum Alternate Tax payable, if any, under section 115JB of the Act (irrespective of whether or not it is exempt under section 10(38) of the Act).
Good article.Thought provoking. We should recomend this fund to clients .
A great option for corporates too, since MAT isnt applicable on earning s from arbitrage funds.