I heard that arbitrage funds have given good returns in 2008. Is it advisable to invest in these funds in the current volatile market?
-Nikhil Mahajan
Arbitrage funds have generated 8.5 per cent returns on an average in 2008 while all other equity funds ended up with negative returns.
Arbitrage funds aim to capitalise on the opportunities arising from a price difference between the spot and the future markets. They constitute an asset class whose returns are not linked to the stock market. Their strategy to profit from the difference between prices of a stock in different markets makes them immune to upswings and downswings of the stock market. They are undoubtedly less risky as compared to equity funds.
These funds are suitable for risk-averse investors. They are least volatile compared to other equity funds. These funds are more tax efficient than debt funds. They are treated as equity funds. The performance of arbitrage funds depends on the availability of arbitrage opportunities. Volatile markets carry a higher potential of mis-pricing between the spot and derivatives markets. Hence, during the current volatile time it is a good investment option.
I had bought units worth Rs 49,000 of a liquid plus fund about a month back. I have opted for the dividend payout option. I received dividend of about Rs 240 during the last one month but the current value of my units is about Rs 48,000. As I need the money, I would like to redeem it. Would I be eligible for a short-term capital loss of Rs 1000 or would this constitute dividend stripping, which is not allowed? How is dividend stripping calculated?
- Parag
The benefit of dividend stripping is no longer available. The law has been revised. If an investor acquires units within a period of three months from the record date, and sells or transfers the same within a period of nine months from the record date, then any loss arising from the transaction shall be ignored to the extent that the loss does not exceed the amount of such dividend. Hence, the capital loss exceeding the amount received as dividend is eligible to be claimed as a short-term capital loss.
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If you withdraw your investment at Rs 48,000, then you incur a short-term capital loss of Rs 1,000. Out of this, you have already received Rs 240 as dividend. As per the income tax regulations, the balance Rs 760 can be claimed as short-term capital loss.
Given the current falling interest rate scenario, do gilt funds form a better option for a 6-month investment horizon than bank fixed deposit (FD)? A 1-3 year FD (post-tax) will yield 6.67 per cent (max). Returns from gilt funds seem attractive right now. Can there be any risk or potential liquidity issue for gilt funds if there are redemption pressures?
- Parthan
In a falling interest rate scenario, the yield of newly issued gilt funds fall. In turn, prices of existing one with higher yield goes up. Gilts will benefit if the interest rates continue to soften. But interest rates have been falling for quite some time now. Also, the yield on gilts is not a smooth line. They are highly traded making them volatile.
In case of the redemption pressure, the liquidity of the gilts held by a fund and the value would depend on their prices at that time. So, one must be prepared for any turbulence that may occur due to their sensitivity to the interest rate outlook.
What is the ceiling amount to invest in mutual funds in a financial year? What are low-risk high-return mutual funds? Can you please name a few such funds?
- Kamlesh Thakur
There is no ceiling amount to invest in mutual funds in a financial year. But for tax purposes, mutual fund investments in equity linked savings scheme of up to Rs 1 lakh can be claimed as deduction from an assessee's taxable income. This is permitted under section 80C.
Low-risk high-return are grades given to mutual funds by rating agencies. Return and risk scores are measures used to rate funds. This is determined by deducting the fund's risk score from its return score.
Some well-rated large-cap equity diversified funds that have low-risk high-return are DSPBR Top 10 Equity, Birla Sun Life Frontline Equity, HDFC Top 200 and HSBC Equity.
If I invest in a mutual fund directly through online platforms like ICICI direct, will it be considered as direct investment with no entry load? - Ashay Nerurkar
If one invests in mutual funds without an intermediary, no entry load is chargeable. But if you invest through ICICI direct, which is a broker, you will have to pay the entry load as it is not a direct investment.
I have invested in DWS Tax Saving Fund. If I change my plan from the growth option to the dividend option, will it be taken as a fresh purchase.
- Ashu Gupta
You cannot change your plan before the three year completion of holding the fund. It is a tax saving fund and carries a lock-in period. If you transfer after three years, it will be treated as a transaction that is redemption of the growth plan and purchase of the dividend plan.