Is it better to invest short-term money in an arbitrage fund instead of liquid funds? The returns from the former, being equity-oriented, are tax-free after a year, while those of a liquid fund, which is a debt fund, would be taxable. More, in a falling interest rate scenario, liquid funds are not expected to return 8 to 9 per cent as earlier. On the other hand, arbitrage funds can comfortably return 7 per cent. Suggest some good arbitrage funds.
- Sanjeev Bhatia
The arbitrage funds’ benefits that you highlight builds a strong case against these. The objective of an arbitrage fund is to capitalise on a stock’s price difference between the spot market (cash segment) and the derivatives market (futures & options segment). They offer attractive investment opportunity when the markets are highly volatile.
But do not ignore the negative side. Investing in arbitrage funds, instead of liquid funds, will be a compromise on liquidity. Further, the growing popularity and asset base of arbitrage funds might pose a problem of inadequate arbitrage opportunities in equities. In such a scenario, a majority of their assets will be parked in cash and fixed income instruments, and equity allocation might fall below 65 per cent, resulting in a debt-fund-like treatment. The tax advantage under these will thus be lost. Since the nature of such a fund is to resort to heavy trading, they also suffer from higher expense ratios.
Some of the good arbitrage funds available are UTI SPrEAD, HDFC Arbitrage and SBI Arbitrage Opp.
I want to transfer my investments from Magnum Global Fund, in which I had an SIP from September 2007 to July 2009, to Magnum Contra through a STP. What would be the nature of the exit load and STT because there is no actual outflow of funds?
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- Prabha Narayan
When you transfer or redeem units, it is made on a first-in,-first-out (FIFO) basis. This means units issued in the first instance will be redeemed/transferred first. And, exit load is very much applicable to redemptions or transfers. Since your initial investments were made in September 2007, they have already completed more than a year of continuity and will not be subject to any exit load. But if your transfer amounts are high and units issued in the recent past have to be redeemed, then the load will apply.
Securities transaction tax (STT) will be applicable in this case as well. Magnum Global is an equity-oriented fund. When you transfer units to another fund, you sell units back to the mutual fund. As is the case with redemptions, it will be subject to STT of 0.25 per cent.
My investment of Rs 50,000 in J M Basic Fund has dropped to Rs 18,000 in value. Should I remain invested, or book a loss and exit?
- Rajsekar
J M Basic is an aggressive fund. From being the best-performing one in 2007, with a 111.44 per cent gain, it has become the third-worst performer in 2008, falling 75.71 per cent. However, this year its returns of 72.05 per cent have put it among the top 10. But a complete recovery is still 140 per cent away. It is in the nature of this fund to be volatile, so stay invested only if you wish to take this type of risk.