Markets have been volatile for almost the last 7-8 months. During this time, most people have stopped investing and have sold their investments due to the fear of losing money. But experienced investors know how to take advantage of this market volatility and convert them into opportunities. With uncertainty and falling of debt mutual funds and schemes, people are now looking towards arbitrage funds. This article will help you decide upon the best arbitrage mutual funds to invest in.
What are Arbitrage Funds?
Arbitrage Funds are a type of mutual fund which makes profits from the volatile market by buying in the cash market and selling them in the derivatives market for a profit by exploiting the price difference. The price differential or the arbitrage spread is small, so the profits made are also relatively low but the corresponding risk is also very low.
Selection Process of the Arbitrage Funds
There are a lot of parameters that are to be seen before selecting an Arbitrage Fund. Some of them are listed below –
- Past Returns – Look at the returns from the past 5 to 10 years and see how the fund has performed.
- Expense Ratio – A high expense ratio means you have to pay more for the administrative services.
- Net Assets – Net Assets will give you a sense of security that if the fund has to shut down at some point in time, you will receive your money back.
- Sharpe Ratio – This ratio will tell you the risk-adjusted return for the fund.
- Exit Load – Many times, investors take an exit from the fund before the maturity period, so you have to pay an exit load for it.
- Minimum Investment – There is a minimum investment amount for every fund, so you should see how much you can afford to invest.
- Fund Managers – Look at the history of the managers, how they have performed over the years.
- Rating – Many rating agencies give ratings to the funds, before investing look at the ratings assigned by some of these agencies.
- Distribution – Look at the percentage of how the money is distributed among equity, debt, and others.
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Recommendations
- Goals and Objectives – Before selecting a fund lay down the goals and objectives of your investment, it will help you to choose from the options available, which will help you meet your goals.
- Negligible Risk – Arbitrage Funds are a good option for those investors who want to make profits in the volatile market without taking too much risk. These funds are not 100% risk-free, but they profit from the volatility of the markets, which makes it a safer option of investment. Markets have been volatile from the past 7-8 months and looking at their current situation; this is the best time to invest in these funds because they do not provide high returns in the stable market situation.
- Investment Horizon – It is advised that people who have a longer investment horizon than six months should invest in these funds because, in the short term, the arbitrage spread is minimal in a volatile market.
- Tax benefit – Arbitrage Funds are hybrid or balanced funds. These funds have a 65% equity portion in them, so they are taxed similarly to an equity fund. So if you keep the investment for more than one year than if any gains made form, it would be taxed at the capital gains rate, which is much lower than the ordinary income tax rate. Also, Gains up to Rs. 1 Lakh are free of tax, and the remaining is charged at 10% (without indexation). In the short-term, it attracts a 15% tax rate.
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There are a lot of funds available in the market, the article states some of the parameters which a person should look at before investing in an arbitrage fund. These parameters will give them a more clear picture of the funds and would help them select the best suitable fund for them.