Nowadays lot of people started investing in arbitrage Mutual funds though its returns is 6-8%.
For 6-8%, debt funds are better. Then is it because of hedging people investing in arbitrage MF’s?
may be they are trying to diversify… ?
Dont get me wrong, just my view, This is like “Why are people investing in large cap than small cap(decent companies) which has more growth potential !”
Btw, arbitrage is a bit more safer than debt funds. It’s just arbitrage, the concept is very simple, they try to capture the difference between underlying and derivatives.
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I am just thinking while conservative hybrid fund (low risk and decent returns) gives 12-14% returns, why still people preferring arbitrage?
Below is a statement from Axis AMC - MF
over a long period of time, debt funds are susceptible to fraud/default/interest risks.
why would i take such a risk ?
BTW, which fund is giving you 12-14%. can you give an example ?
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Exactly!
bruh, this funds averages 9% in 3 years.
4.5% in last year.
what 12% returns are you talking about ?
12% on conservative hybrid- Canara roebco conservative hybrid. Please check it in google
- Arbitrage funds are apt for those investors who are looking to have equity exposure but are worried about the risk associated with the same.
- Arbitrage funds work on the mispricing of equity shares in the spot and futures market. Mostly, it takes advantage of the price differences between current and future securities to generate maximum returns. The fund manager simultaneously buys shares in the cash market and sells it in futures or derivatives markets. The difference in the cost price and the selling price is the return
The above basically means that when the transaction is executed, there is no ambiguity, the fund would have made the margin which is profit on the transactions.
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These funds take advantage of the markets to generate profits for the investors over a medium time horizon. This will handle the volatility risk that may arise due to equity exposure.
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Arbitrage funds are a safe option for risk-averse individuals to safely park their surplus funds when there is a persistent fluctuation in the market.
To answer your question, these funds are subscribed by very specfic investors who fit into the above category.
Disc: Most points taken from clear tax website.
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Couple of things:
Arbitrage funds are unique, as they are structured like equity fund, but in most cases they behave like a short-term debt fund.
People are choosing arbitrage funds for parking money for short term, not really for medium / long term. In a way arbitrage fund is acting as replacement for liquid funds or money in Bank saving account.
Most arbitrage fund returns are less than 6% for last year. Mostly near to 4-5% range. Still this is better return than what liquid funds are giving and also this gets taxed like equity, so it is tax effective for some people. Hence people (and lot of institution) use it to park short term money
This is not correct comparison. Conservative hybrid fund still has equity portion and if market dives, or fund manager’s call goes wrong, it can give loss of capital too.
Chances of that happening is miniscule in Arbitrage fund.
Hence Arbitrage fund is preferred for short term money parking over liquid fund and Bank saving account.
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Arbitrage funds are treated as equity oriented funds; so net of tax return would be higher if gross returns are similar to debt funds.
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