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Business News/ Money / Personal Finance/  Arbitrage mutual funds catch investors’ fancy. Should you invest too?
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Arbitrage mutual funds catch investors’ fancy. Should you invest too?

Arbitrage mutual funds have received a high inflow vis-à-vis its counterparts in the category of hybrid funds. This trend has been around for the past four months.

In the month of July, Arbitrage mutual funds received an inflow of Rs 10,074 crorePremium
In the month of July, Arbitrage mutual funds received an inflow of Rs 10,074 crore

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 Rs 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 Rs 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 Rs 1,381 crore, dynamic asset allocation funds got Rs 419 crore and conservative hybrid funds saw an inflow of Rs 164 crore.

Month       Inflows (Rs crore)
April           3,716
May                 6,640
June              3,366
July               10,074

(Source AMFI)

“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 Rs 13,721 crore, whereas dynamic asset allocation funds saw an outflow of Rs 1,042 crore, multi asset allocation funds saw an inflow of Rs 2,506 crore and conservative hybrid funds saw an outflow of Rs 71.30 crore.

 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

 

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A brokerage account is used to buy and sell securities such as stocks, bonds, and mutual funds.
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A brokerage account is used to buy and sell securities such as stocks, bonds, and mutual funds.

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Published: 27 Aug 2023, 10:57 AM IST
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