Mumbai: In the past year, wealthy investors have parked ₹89,400 crore in arbitrage funds, which now have a total of ₹2.35 lakh crore. This shows that these funds are becoming very popular, making up 53% of new money coming into hybrid funds. Arbitrage funds are attracting investors because they usually give better returns than regular debt funds, and they are taxed more favorably.
Data shows that arbitrage funds made an average return of 7.25% over the last year. In comparison, liquid funds returned 7.13%, and overnight funds earned only 6.63%. Fund managers say that returns from arbitrage funds have decreased slightly lately due to high inflows and declining short-term rates. The market has been pulling back since the election results in June, prompting many investors to play it safe.
For short-term gains, arbitrage funds are taxed at 20%, while long-term gains are taxed at 12.5%. In comparison, debt funds can be taxed at higher rates based on income slabs. Experts believe arbitrage funds will keep doing well because 45 new stocks have been added to the futures and options market, and no rate cuts are expected soon.
Arbitrage funds work by buying and selling stocks to take advantage of price differences. They are less risky because they hedge their bets and don’t carry credit risk. Plus, since they invest mostly in stocks (at least 65%), they are taxed as equity funds. This tax advantage is leading many rich investors to choose arbitrage funds over other options like liquid funds.
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