Posted By: Admin
The next 18-24 months is going to be a challenging time for the global and domestic economies. No one alive has ever faced a situation of coming back from near stoppage back to full speed of economic growth and we have no idea of the problems that is likely to crop up along the way.. With Excess Liquidity due to liquidity push and the lack of economic activity, the interest rates have moved down pretty drastically. A 3 year FD with a nationalized bank is 5.50% per annum or thereabouts. Moreover if the investor is on a taxable slab as 30 % the post tax return is only 3.85%, which may be less than inflation itself. The situation resembles the devil on one side & deep sea on the other i.e Equity markets are likely to be volatile and Fixed Deposits interest rate is very low.
What is the solution for retail investors ?
Welcome Arbitrage Funds : Arbitrage fund is a type of mutual fund that leverages the price differential in the cash and derivatives market to generate returns. The returns are dependent on the volatility of the underlying asset ie Equity markets. Example if say Infosys is valued at Rs 950 in the Cash market ( NSE/ BSE) , and at the same time due to market inefficiencies could be priced at Rs 925 in the derivatives market, the fund manager would then sell in the cash market and buy in the derivatives markets , simultaneously. Therefore there is no risk due to the price movement, however the returns are from equity therefore taxation applicable to equity funds apply to arbitrage funds and since long term taxation for equity funds is one year, they will also work well for people looking for short term maturities like a year or thereabouts. An indicative list of Arbitrage funds and their performance is enclosed for your information.
Table containing the Arbitrage Funds…
Conclusion : Arbitrage funds are the panacea for low risk taking investors. In a situation of high and persistent volatility, arbitrage funds provide investors a safe avenue to park their hard earned money. These funds capitalize on the market inefficiencies and generate profits for the investors. As these funds invest predominantly in equities, their tax treatment is at par with equity funds. You should expect a far superior return to your bank FD for a 1 or 2 year basis on a post tax basis by investing in the Arbitrage funds.
Safe Harbor : Investment in Mutual Funds are subject to market risks, please read the scheme details carefully before investing.