Low cash-futures spread hits arbitrage funds

FUND QUERIES

I have been investing in SBI's arbitrage fund since December 2006. The category’s returns were around 10 per cent when I entered the fund. But for the past six months, the fund has returned only five per cent (annualised). While the arbitrage opportunities exist all the time, why have these funds stopped performing recently? Even money market instruments are generating higher returns. -Tarun Goel

Arbitrage funds aim to capitalise on the opportunities arising from the mis-pricing between spot and futures/options market, which is known as cash-futures spread. These opportunities, as you have rightly said, are always there. But the problem lies in the fact that volumes are not large enough for a fund house to profit from them. In the last few months, the cash-futures spread has remained narrow and thus the funds have not able to make as much profit as they did in previous years.

Is it possible that a mutual fund can dupe investors? I fear that if I invest for a long term in a private mutual fund, after a few years, it might just disappear. Is it safe to invest in a private mutual fund house? I believe it has happened with other financial organisations. In the past, some private financial organisations (for instance, Peerless, Sainchayani, Golden Harvest, JVG and so on) have cheated investors. -AM Deshpande

Private financial organisations you mentioned are not mutual funds. In India, mutual funds must be registered with the market regulator, the Securities and Exchange Board of India (Sebi). In order to protect the interest of investors, Sebi formulates policies and regulates mutual funds. None of the registered mutual funds can run away with the investors’ money as the funds are managed by Sebi-approved asset management companies (AMCs). The custodian too is registered with the regulator and it holds securities, belonging to various funds, in its custody. Currently, there are 36 AMCs operating in India. To be on the safer side, you can check for these registered mutual funds on the Sebi website and then invest in them.

I want to change some funds from my portfolio, like Reliance Natural Resources and Reliance Vision. What is the cost of switching within the same AMC or a different one? -Sunil Chaturvedi

Switching from one scheme to another is a combination of two distinct transactions. When you change schemes, you redeem your units in one fund and invest in another. Therefore, applicable entry and exit loads in the respective schemes will be charged, irrespective of whether you switch within the same AMC or in another one.

I invested in SBI Magnum Taxgain in March 2006. This investment is going to complete its three years’ lock-in period in March 2009. I want to remain invested in this fund for another year. Is it possible?

You can remain invested in a tax-planning scheme as long as you want, even after the lock-in period of three years. In such equity-linked savings scheme (ELSS), you cannot redeem your units before the completion of the lock-in period of three years, but it is not mandatory to withdraw your money after three years.

I am investing Rs 17,000 a month in different mutual funds through the systematic investment plan (SIP). I have invested around Rs 1.5 lakh in 4-5 different mutual funds from Reliance, SBI, HDFC, Birla and Principal AMC. Should I keep investing through SIPs in today's unstable market conditions? Can the markets in India tank like those in the US, affecting my investment?-Smita W

If your have a healthy and balanced portfolio and you are investing with a long-term view, there is no need to worry about the market gyrations. In the long run, SIPs are a better mode of investing in mutual funds than haphazard investments. It does not seem that India can suffer in a similar fashion as the US, where the financial institutions had given the mortgage loans without checking the credit-worthiness of the customers. In India, the situation is different. Although the real estate sector is facing a slowdown, due to tightening of liquidity, the trend seems to be temporary. Also, the Reserve Bank of India is closely monitoring the underlying issue of liquidity.

If I switch from a loss-making fund to an ELSS, would I get capital loss benefit, that is, can I balance my short-term capital gains elsewhere against a loss? Can a capital loss be set off only against capital gains or can it be deducted from one’s taxable income too? - Anubhav

The capital loss resulting from the sale of units can be set off against other capital gains, irrespective of whether you are switching to an ELSS fund or not. If your loss is a short-term capital loss, it can be set off against both, short-term as well as long-term capital gains. But long-term capital loss can be set off only against long-term capital gains. As the long-term capital gains are exempt from income tax in India, no long-term capital loss is eligible to be set off against long-term capital gains. Unadjusted short-term or long-term capital loss can be carried forward for eight subsequent years.
 

Loss Adjustment	Long Term Capital Gain	Short Term Capital Gain
Long Term Capital Loss	Yes	No

Short Term
Capital LossYesYes
The answer to the second part of your question is that according to tax regulations, capital losses can be set off only against capital gains. Hence, capital loss cannot be deducted from taxable income.