Market volatility is prompting retail investors to turn towards arbitrage funds for investments. Data by Association of Mutual Funds in India (AMFI) reveals that arbitrage funds accounted for 37 percent of the total inflows into equity funds in the last 2 months.
Going by the AMFI data, out of the total Rs 31,500 crores received by the MF industry in equity funds, Rs 11,500 crore worth of inflows came through arbitrage funds in July and August 2017.
The 43-player mutual fund industry had witnessed net inflows of Rs 5,225 crore and 6,303 crores in arbitrage funds in August and July, respectively.
In terms of sales, during August, arbitrage funds constituted 24 percent of total gross sales of equity funds. On the other hand, the assets of arbitrage funds stood at Rs 50,445 crore, which is 9 percent of the total equity AUM of 5.74 lakh crore, as on August 2017.
Fund managers attributed the rising interest in arbitrage funds to market volatility and favourable taxation.
Arbitrage funds perform well when the equity markets are volatile as they exploit the price difference between the spot market and derivatives. They carry very low risk as the fund manager creates a market neutral position by buying in cash market and selling in futures. Market volatility doesn't entail more risk for the investor in such funds. In fact, arbitrage opportunities exist only when the markets are unstable and uncertain.
Fund managers also said that slew of debt investors are preferring to park their surplus cash in arbitrage funds instead of liquid schemes.
These funds are treated as equity funds for taxation. This means investments in them sold before a year qualify for a short-term capital gains tax of 15 percent. Liquid funds, on the other, are treated as non-equity funds for taxation. If they are sold before three years, the gains are treated as short-term capital gains, added to the income and taxed according to the income tax slab applicable for the investor.
Currently, long-term capital gains are not taxable on equity investments. Debt schemes like ultra short-term scheme qualify for long-term capital gains tax only after three years. Even then they are taxed at a higher rate of 20 percent with indexation benefit.
Asset managers are anticipating more volatility in the market in the coming days as they believe that the current valuations are very high at this point and a deeper correction is likely. Hence, this category of funds may be favoured for investments. Arbitrage funds may offer better returns because of the volatility in the market
Arbitrage funds have offered 7.48 percent returns in the last five years, 7.07 percent in three years and 6.16 percent in the last one year.
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