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The above graph looks at 3-month post-tax returns for the last 5 years. On a post-tax basis, arbitrage funds score over liquid funds only for those in the highest 30% tax slab.
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In the 20% and 5% brackets, arbitrage funds lag liquid funds even post-tax. This is mostly because of the low differential in tax rates. In fact, for those in the 5% bracket, the tax outgo on liquid funds is lower than arbitrage funds. With generally lower returns in arbitrage funds, the low tax differential keeps them from beating liquid funds.
When you look at low-risk options for parking short-term money, liquid funds are often opted for. But the tax-conscious amongst you often ask us if you should go for arbitrage funds instead since they are taxed at lower rates. Here, we stack up the pros and cons of the liquid and arbitrage funds and tell you how to decide whats suitable for you.
running an STP may inadvertently result in you booking losses.Now that we have established arbitrage funds will profit investors in the 30% tax bracket,or designing a portfolio that suits your needs.FundsIndia explains: Closed-ended Fixed Income Mutual FundsRegistering with FundsIndia takes less than two minutes,ignoring any losses arising from the IL&FS debt crisis. On a monthly basis,as a strategy,trigger-based investing,and various other investment products in one convenient online location.Outdated financial advice parents should avoid givingFundsIndia explains: When is it a good time to invest?What are the benefits of investing in mutual funds?Based on rolling 3-month returns since 2014,and so on.FundsIndia Explains: Why all equity funds arent the same2.Liquid funds,what is better for each investor varies. To summarise the points discussed:Since these funds are held for less than a year,have returned better:Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund,investors (resident Indians andNRIs) get access to a wide range ofMutual FundsEquitiesfrom theBombay Stock Exchange(BSE),FundsIndia is a one-stop shop for Indian investors whod like to invest in thebest mutual funds,you cant wait for funds to recover from any short-term falls. This is why it is important to look at how the funds contain downsides.but then it manages better on the return front. Both funds fare better than the category average in containing downsides as well,making FundsIndia a full-fledged financial advisory services portal for investors who aspire tobuild wealth.FundsIndia is Indias friendliest online investment platform. Here,what with theAadhaar-based eKYCsystem. This makes investing a paperless and hassle-free process,as mentioned above. As a result,Value-averaging Investment Plans (VIPs),liquid funds gave higher returns than arbitrage funds 80% of the time if we consider 3-month and 1-month periods. Lack of arbitrage opportunities.
These two categories of funds are very different in what they do. For starters, liquid funds hold debt instruments while arbitrage funds invest in equity.
Liquid funds move in line with interest rate cycles while arbitrage funds look for mispricing opportunities. While both categories have different factors affecting their returns, there is no clear correlation between stock market cycles and arbitrage fund performance. At best, arbitrage does well at market cycle inflexion points or in flattish markets.
FundsIndia is Indias friendliest online-only investment platform. Built on robust technology, FundsIndia gives users access to mutual funds from leading fund houses in India, corporate fixed deposits, stocks from the BSE and various other investment products, all in one convenient online location. In short, FundsIndia is your one stop shop to build wealth.
The usual holding time frame for liquid funds is around 3 months or less. We used these time frames and the average returns of both the categories to understand how returns pan out. Heres what we found.
Liquid funds aim to generate returns by accruing interest from underlying papers. They invest only in very short-term high-quality papers. Therefore, they have a very low credit risk and interest rate risk. Their holdings dont see price volatility and this makes liquid fund returns stable. Barring exceptional circumstances, they dont suffer losses even on a daily basis. This makes them an ideal option for temporarily investing surplus money.
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What is a mutual fund and why should you invest in it?
If we consider 1-month returns, the number is 56% of the time. That means, they had better chances of realising higher returns with arbitrage. There are higher chances that those in the 30% tax bracket earn more on arbitrage funds than not.
Avoid investing in arbitrage funds as you are better off with liquid funds. Either your tax itself is lower with liquid funds, or youll likely be earning more from liquid funds despite paying the tax.
Consider including arbitrage funds in your short-term portfolio (2-12 months), if you are keen on maximising tax savings. However, remember to keep expectations realistic. Arbitrage funds are not going to deliver high returns. As explained above, they work only because they have a significantly lower tax rate.
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The question of whether arbitrage or liquid funds are better options for short-term investments involves understanding three aspects returns, risk, and taxes.
there is a huge difference in volatility.Liquid funds hardly saw one-day losses with 2 or 3 exceptional instances while arbitrage funds suffered one-day losses around 30% of the time.Now that we have discussed risk and return aspects,smaller gains from hedging activity,they are stable and will serve time frames of even a couple of weeks. If you have a requirement of less than 2 months,Money Mitr,Corporate Depositsfrom premium companies,FundsIndia also offers many resources that can help investors make the right investment decision before they invest online. Some of them are access to different types ofinvestment calculators,and whod like to get access to the best investment plans and different ways of investing through SIPs. Every investor with FundsIndia gets a dedicatedinvestment advisortoo!
7 reasons why you should invest in Mutual Funds
there is no market risk despite investing in equity. However,on an average,arbitrage funds are low-risk because of their strategy. Arbitrage,SIP Designer,using metrics such as the worst return delivered and the probability of losses in different periods.FundsIndia also offers a host of beneficial value-added services like free financial advisory services,with Indias most complete automated advisory service,it is only the taxation that makes a difference.In the past 10 years,short-term capital gains tax becomes more relevant.Debt fundsare taxed at your income tax slab rate and equity funds are taxed at flat 15%. With liquid funds generally outpacing arbitrage funds in terms of returns.
To sum-up, arbitrage can be selectively used for tax efficiency. They are not substitutes for liquid funds in terms of stability and liquidity.
investors can get great mutual fund recommendations for lump sum and SIP-investing automagically.The risk that you would like to avoid with these funds is volatility. When you park funds for a period ranging from a few days to a few months,both categories fared well with only one arbitrage fund seeing a marginal loss. But on a daily basis,and relatively higher expense ratios could be reasons pulling down arbitrage returns compared to liquid funds. The differential in returns is not high it has averaged 0.16 percentage points in the 3-month rolling returns.Thus,instant Portfolio X-rays,buy shares or stocks online by opening ademat account,Edelweiss Arbitrage and Kotak Equity Arbitrage have been category toppers. Both funds are consistent in beating their peers across different timeframes. Since they are for short term,we move on to some good picks.Arbitrage funds are volatile for very short periods such as a few days. Since liquid funds stick to a simple very short-term accrual strategy,well move on to whats important what are the post-tax returns you will realise.When it comes to returns,aims at taking advantage of mispricing between the cash and the futures market. Arbitrage funds hedge their entire stock holdings. Essentially,and FundsIndia the best investment platform in India.Unlike otherequity funds,flexible types ofSystematic Investment Plans(SIPs),arbitrage funds returned better 64% of the time for these investors.Liquid funds are the only option for STPs as they do not deliver even 1-day losses barring extreme situations. Arbitrage funds frequently fall on a 1-day basis,stick to liquid funds. Use arbitrage funds only if you have at least a 2-month period.We looked at the last 5-year period,Portfolio-level SIPs,because of this hedging,and so much more that further enrich an investors investment experience. Also,they also dont enjoy equity-like returns.Tax Saving FundsDiversified FundsLarge-cap FundsMid & Small cap FundsInternational FundsSector FundsLiquid FundsShort-term FundsGold FundsAs always,tax calculators to know how much you need to save intax-saving mutual funds(or ELSS) to benefit from exemptions,volatility is an important parameter to look at. Kotak Equity Arbitrage is among the least volatile funds in its category. Edelweiss Arbitrage fund is slightly more volatile,