For mutual fund investors, here’s some good news. Almost all arbitrage funds have outperformed their benchmark indices in the last six months. With volatility still plaguing the market and the debt market taking a hit due to consecutive rate hikes, arbitrage funds have bucked the downward trend by clocking positive returns.
Arbitrage funds, as a category, have yielded 3.03 per cent returns in the last six months, when all other funds except pharma were mostly in the red. Pharma funds gave returns of 6.86 per cent.
UTI’s Spread Fund has been the best performer, posting 4.26 per cent returns followed by HDFC Arbitrage and Lotus Arbitrage with returns of 3.10 and 3.04 per cent, respectively. While Crisil’s Liquid Fund Index posted a return of 2.26 per cent on an average, some of these funds have returned more than 2.5 per cent.
Arbitrage funds take advantage of opportunities between cash and futures market whereby a stock is bought in the cash market and sold in the futures market in order to take advantage of the difference in prices. This strategy normally acts as a shield against market volatility as both buying and selling transactions offset each other.
“The outlook is quite good for these funds in the coming months as the markets are expected to remain volatile and sometimes even bullish,” said Arun Aggarwal, Fund Manager, SBI, Arbitrage Opportunities Fund.
“The premium of futures to cash keeps expanding and contracting in a volatile market and so there are a lot of opportunities for arbitrage funds to take positions,” added another fund manager.
Value Research Chief Executive Officer Dhirendra Kumar said, “It is quite an interesting class of funds. There are enough arbitrage opportunities available in the market on Tuesday due to intraday upswings and downswings. However, it is a complex fund for investors to understand.”
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Financial planners say that while these funds can give good returns, they should form around 25-30 per cent of one’s fixed income portfolio for portfolio diversification. Rishi Nathany, certified financial planner says that such funds are low risk because transactions happen in the cash as well as futures markets simultaneously.
If you are a short-term investor, go for the dividend option because the taxation is slightly over 14.5 per cent and will be deducted by the fund house.
The tax liability, otherwise, would be 30 per cent for the investors in the highest income bracket. For the long-term player, growth option would be ideal because the taxation is 10 per cent without indexation and 20 per cent with indexation.