These funds are a distinctive type, leveraging the expanding spreads between the cash and stock futures segments within the market. Funds in this hybrid category primarily focus on capitalizing on these arbitrage opportunities. Traders specializing in arbitrage can exploit these variances to generate profitable returns. One of the key appeals of arbitrage funds is their utility as a secure repository for your funds. Numerous investors favour arbitrage funds due to their substantial tax advantages over debt and money market funds, attributable to the tax benefits associated with equity investments.
Not all investors view arbitrage funds with the same fervour. The recent launch of the Parag Parikh Arbitrage Fund has caused many people to question the validity of investing in such funds. These funds do not yield high returns with the best performing arbitrage fund earning less than seven per cent returns in the past 10 years. However, given the current state of economic uncertainty owing to unforeseen geopolitical tensions and other macro factors, many people are moving their money to these funds for continued returns while also availing tax deductions.
Suresh Sadagopan, Founder, Ladder7 Financial Advisories said, “Arbitrage fund is a low-risk fund that can possibly give four to five per cent returns every year. This will be a good place to park for any short-term needs as this is treated as an equity fund for taxation purposes. The STCG tax is hence only 15 per cent till the completion of 12 months and 10 per cent after that after the initial LTCG amount of ₹1 lakh.”
Hiren Thakkar, Chartered Accountant Proprietor, Hiren S Thakkar & Associates explains how this is the perfect time to invest in arbitrage funds due to uncertainty and high valuations. Thakkar explained, “You don’t want to put excess savings in equities because of the high valuation. When you are not aware of the nitty gritty of debt funds and want to park for a short term, say less than a year or so, or wish to avail of the tax benefits, arbitrage funds may be a great choice to put your money in.”
While explaining who should invest in arbitrage funds, Viral Bhatt, Founder, Money Mantra explained, “You should consider investing in an arbitrage fund if and when you are looking for a low-risk investment option. Arbitrage funds are considered to be relatively low-risk because they exploit price inefficiencies between different markets. You want to earn moderate returns. Arbitrage funds typically offer returns that are higher than liquid funds, but lower than equity funds. You are investing for a short to medium-term horizon. Arbitrage funds are best suited for investors who are looking to invest for a period of three to five years.”
Should you invest in the Parag Parikh Arbitrage Fund?
PPFAS Mutual Fund launched the Parag Parikh Arbitrage Fund on October 23, 2023. The new fund is on offer till October 27, 2023, post which it would be available for sale and repurchase on November 03 this year.
The Scheme Information Document (SID) explicitly states, “The investment objective of the scheme is to generate capital appreciation and income by predominantly investing in arbitrage opportunities in the cash and derivatives segment of the equity market, and by investing the balance in debt and money market instruments.”
This fund shares a common approach with other arbitrage funds in its strategy to profit from the price differentials of stocks and their eventual convergence over time. The availability of arbitrage opportunities in the market has decreased because of increased market participation. Arbitrage fund investments are not particularly attractive to most investors unless they are seeking tax benefits or have a strong aversion to sudden market fluctuations.
Shyam Sekhar, Founder, ithought Financial Consulting LLP, a SEBI Registered RIA & PMS Firm, says, “Arbitrage funds are preferred mostly for taxation benefits. There is not much to differentiate between different arbitrage products. Those who wish to keep liquid money in arbitrage strategies as a parking investment can consider this newly launched fund by PPFAS, especially, if they wish to shift to their equity schemes in the future.”
Justifying the idea behind investing in this recently launched Parag Parikh Arbitrage Fund, Basavaraj Tonagatti, a SEBI-registered investment advisor and founder of Basu Nivesh added, “Given the fund house’s history of adopting a conservative approach in both the liquid fund and conservative hybrid fund, and presuming they maintain a similar strategy in their arbitrage fund in a debt allocation of approximately 35 per cent, I strongly recommend considering this fund over other arbitrage funds.”
Old funds versus new fund offers
There is a lot at stake when it comes to opting for new fund offers. Though these offers look attractive owing to the low net asset value (NAV), there is no way you can gauge how these funds will perform in the long run.
As Priyadarshini Moreshwar Mulye, a SEBI Registered Investment Advisor and Founder, ARTHA FinPlan put forth, “Arbitrage funds are funds which focus on generating returns through price difference between spot and derivatives market. However, when we invest in NFO, there are no past records of performance, risk parameters, etc., available to study and analyse. So, one can invest if he/she is ready to go with a totally new fund in the market, has knowledge about how this category of funds work, and can remain invested with active review.”
Rajani Tandale, Product Head – Mutual Fund, 1finance.co.in voices her opinions on putting money in existing funds rather than running after new fund offers. Tandale said, “The PPFAS Arbitrage Fund is a plain vanilla arbitrage fund that mirrors the principles of many others in its category. It allocates 65 per cent to equity arbitrage and around 35 per cent to debt and money market instruments, providing a balanced approach to capitalizing on arbitrage opportunities. Intriguingly, there are close to 26 funds in the arbitrage category, offering investors a diverse array of choices. If you’re considering diving into this space, it’s wise to explore existing arbitrage funds with a proven track record, as this can provide peace of mind and confidence in your investment.”
To invest or to not invest has more to do with your financial goals and your understanding of how this market will behave in the long run. There are no fixed rules to investing money. “To each, his own” is the mantra that guides all our investment decisions. However, if you are not sure of how, where, and when to invest your money, it is best to consult a financial advisor to benefit from their expertise and experience.
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Updated: 25 Oct 2023, 11:01 AM IST