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Best arbitrage mutual funds to invest in 2019

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Best arbitrage mutual funds to invest in 2019

Heres a monthly update on our recommended arbitrage mutual funds.

Heres a monthly update on our recommended arbitragemutual funds. Once again, there are no changes in our recommendations this month.

Arbitrage fundsare favoured by many mutual fund investors, especially high networth investors, to park money for a short period because of their edge overdebt mutual fundsin terms of taxation.

Debt mutual funds, if sold before three years, attract short-term capital gains tax. The short term capital gains are added to the income of the investor and taxed according to the income tax slab applicable to the investor. Arbitrage funds are treated as equity mutual funds for taxation. If investments in arbitrage funds are sold before a year, the investor need to pay short term capital gains tax of 15%.

Investments in debt mutual funds qualify for long-term capital gains tax only if held for over three years. Long term capital gains on debt mutual funds are taxed at 20 per cent with indexation benefit. The indexation benefit allows investors to inflate the cost of purchase and it helps to reduce the total tax outgo. If arbitrage funds are sold afer a year, the investor must pay the long-term capital gains tax of 10%.

If you are new to mutual funds, here is how arbitrage funds work. These mutual fund schemes look to exploit the arbitrage opportunities available between the cash and the future market. Essentially, these schemes look for the price difference between the spot market and derivatives market to earn risk-free returns. The price mismatching would be more in a volatile market. So, volatility works in favour of arbitrage mutual fund schemes.

Arbitrage mutual fund schemes are expected to offer marginally higher post-tax returns than debt mutual funds. However, this will not be the case always. For example, the arbitrage fund category is offering around 5.94 per cent in the last on year.

If you have an investment horizon of nine months to a year, you can invest in arbitrage funds for lower volatility, says Deepali Sen, Founder, Surjan Financial Advisors. if you want okay returns with lower volatility, you should go for arbitrage funds, she adds.

Here are our recommended arbitrage mutual fund schemes you may consider to invest:

If you are interested in the methodology employed to shortlist these schemes, you may read:

< Mutual Funds has employed the following parameters for shortlisting the Hybrid mutual fund schemes.

1.Mean rolling returns:Rolled daily for the last three years.

2.Consistency in the last three years:Hurst Exponent, H is used for computing the consistency of a fund. The H exponent is a measure of randomness of NAV series of a fund. Funds with high H tend to exhibit low volatility compared to funds with low H.

i) When H equals 0.5, the series of return is said to be a geometric Brownian time series. These type of time series is difficult to forecast.

ii) When H is less than 0.5, the series is said to be mean reverting.

iii) When H is greater than 0.5, the series is said to be persistent. The larger the value of H, the stronger is the trend of the series

3.Downside risk:We have considered only the negative returns given by the mutual fund scheme for this measure.

Z = Y/number of days taken for computing the ratio

i) Equity portion: It is measured by Jensens Alpha for the last three years. Jensens Alpha shows the risk-adjusted return generated by a mutual fund scheme relative to the expected market return predicted by the Capital Asset Pricing Model (CAPM). Higher Alpha indicates that the portfolio performance has outstripped the returns predicted by the market.

[Risk Free Rate + Beta of the MF Scheme * (Average return of the index – Risk Free Rate

ii) Debt portion: Fund Return Benchmark return. Rolling returns rolled daily is used for computing the return of the fund and the benchmark and subsequently the Active return of the fund.

5.Asset size:For Hybrid funds, the threshold asset size is Rs 50 crore

Read this article in :HindiRead more onDebt Mutual FundsMutual Fund NewsKotak Equity Arbitrage FundReliance Arbitrage FundSTCG taxArbitrage fundsLTCG taxmutual fundsAlso Read

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