Wealthy and financially savvy investors put money into arbitrage funds for short periods because of the tax advantage these schemes offer over debt schemes. Arbitrage funds are taxed like stock plans. They qualify for the 10% long-term capital gains tax if the investments have been held for more than a year. If investments are made for less than one year, a short-term capital gains tax of 15% will apply.
Sure, arbitrage funds have lost some of their shine lately due to declining returns. The fluctuations in the market can help these charts as they will provide better opportunities. If you are still investing in arbitrage funds or considering investing in them, this article may interest you.
Arbitrage funds look for arbitrage opportunities available in the market. In these charts, fund managers look for a price difference they can exploit between the cash and derivatives markets. They can also invest in debt and equity securities if arbitrage opportunities are not available in the market.
Arbitrage fund returns have nothing to do with the interest rate system because they are always looking for arbitrage opportunities. Therefore, it may be suitable for investors who do not wish to make a call on interest rates. Or it could be a good investment option in the current scenario where interest rates are likely to rise in the coming months.
However, you should be aware that there may be periods when there are not many arbitrage opportunities in the market. This can happen when the market is trending in one direction. A volatile market is good for money arbitrage as there will be more arbitrage opportunities available.
Here are our recommended arbitrage schemes that you may want to consider investing in the new year:
- Kotak Stock Arbitrage Fund
- Nippon India Arbitration Fund
Methodology
We used the following parameters to shortlist mixed mutual fund plans.
- Average mobile performance: Rolled daily for the last 3 years.
- Consistency in the last three years: Hurst exponent, H is used to calculate the consistency of the fund. The exponent H is the randomness measure of the box's NAV series. Funds with a high H tend to show lower volatility compared to funds with a low H.
- When H is equal to 0.5, the return series is said to be a Brownian geometric time series. It is difficult to predict this type of time series.
- When H is less than 0.5, the series is said to mean undo.
- When H is greater than 0.5, the series is said to be stationary. The higher the H value, the stronger the trend of the chain.
- Downside Risk: We have only considered the negative returns presented by the mutual fund scheme for this metric.
X = Returns below zero
Y = Sum of all squares of X
Z = Y/number of days taken for computing the ratio
Downside risk = Square root of Z
- Excellence
- Equity portion: measured by Alpha Jensen during the last three years. Jensen's Alpha shows the risk-adjusted return of a mutual fund scheme relative to the expected market return projected by the Capital Asset Pricing Model (CAPM). A high alpha indicates that the portfolio has outperformed the returns expected by the market.
Average returns generated by the MF scheme =
[Risk Free Rate + MF Chart Trial * {(Index Average Return - Risk Free Rate})
- Portion of debt: the return of the fund - the standard return. Periodic returns that rotate daily are used to calculate the fund's performance and benchmark, and therefore the fund's active return.
- Asset size: For hybrid funds, the minimum asset size is Rs 50 crore
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