Arbitrage mutual funds are a popular choice for investors seeking after-tax returns and minimizing volatility. These funds exploit price differences between cash and derivatives markets, offering equity-like taxation benefits.
Key Features of Arbitrage Mutual Funds
- Long-term capital gains tax of 12.5% (if held for more than a year) or 20% (if held for less than a year)
- Volatility-independent returns, unaffected by interest rates
- Opportunities for debt securities and equities investment
Arbitrage funds are a type of hybrid mutual fund that seeks to exploit price differences between the cash and derivatives markets. In other words, fund managers look for arbitrage opportunities that can be exploited between these two markets. They may also invest in debt securities and equities if there are no arbitrage opportunities available in the market.
How Arbitrage Funds Generate Returns
- The fund manager looks for price differences between the cash and derivatives markets
- The manager buys the underpriced asset in the cash market and sells it in the derivatives market, or vice versa
- The fund earns the difference between the two prices, which is the arbitrage profit
Arbitrage funds are taxed like equity mutual funds, which means they qualify for long-term capital gains tax of 12.5% if investments are held for more than a year. If investments are for less than a year, short-term capital gains tax of 20% will be applicable.
Benefits of Investing in Arbitrage Mutual Funds
- After-tax returns, as the funds are taxed like equity mutual funds
- Volatility-independent returns, unaffected by interest rates
- Opportunities for debt securities and equities investment
Arbitrage funds are a great option for investors who want to minimize volatility and maximize returns. They are also suitable for investors who don’t want to take a call on interest rates, as the returns are independent of the interest rate regime.
Highlights of the Best Arbitrage Funds to Invest in April 2025
| Kotak Equity Arbitrage Fund | Nippon India Arbitrage Fund |
| Rolling returns: 6.5% (1 year), 9.2% (3 years) | Rolling returns: 6.8% (1 year), 10.5% (3 years) |
| Alpha: 1.5 | Alpha: 1.8 |
Methodology for Selecting Arbitrage Funds
- Mean rolling returns: Rolled daily for the last three years
- Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund
- Downside risk: Only negative returns are considered
- Outperformance: Jensen’s Alpha for the last three years
- Asset size: Rs 50 crore
The selection of arbitrage funds is based on the following parameters:
* Mean rolling returns: Rolled daily for the last three years
* Consistency in the last three years: Hurst Exponent, H is used for computing the consistency of a fund
* Downside risk: Only negative returns are considered
* Outperformance: Jensen’s Alpha for the last three years
* Asset size: Rs 50 crore
By considering these parameters, ET Mutual Funds has shortlisted the top picks for arbitrage funds to invest in April 2025.
Conclusion
Arbitrage mutual funds are a great option for investors seeking after-tax returns and minimizing volatility. With their long-term capital gains tax benefits and volatility-independent returns, they offer a unique advantage. By considering the methodology outlined above, investors can select the best arbitrage funds to suit their investment goals. The funds mentioned above, Kotak Equity Arbitrage Fund and Nippon India Arbitrage Fund, have been shortlisted based on their rolling returns, alpha, and consistency in the last three years. They offer a combination of after-tax returns, volatility-independent returns, and opportunities for debt securities and equities investment. Investors can consider these funds as part of their investment portfolio to maximize returns and minimize volatility. By doing so, they can achieve their investment goals and secure their financial future.
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