S&P BSE Sensex*	Re/US $	Gold Rs/10g	Crude ($/barrel)	FD Rates (1-Yr)
36,541.63 |883.77 2.48%	68.56 |0.54 0.78%	30,147.00 | -320.00 -1.05%	74.45 |-2.94 -3.80%	5.00% - 7.00%

 

Rajesh is a smart businessman. He belongs to country ‘B’. He tried striking the direct deal with the multi-national company directly but it was reluctant to do business with him.

Do you know, what is he doing now? He’s importing the same goods from country ‘A’ and selling them for a premium price in his country. To reduce the risk of his business, he first secures bulk orders in his country and then makes the purchase requests.

He has assured demand and assured supply.

In simple words, he’s exploiting the price differential for virtually running no risk. What he has to lose if something goes wrong?

Cost of transporting goods and other incidental costs.

In finance, opportunities created by the mispricing of an asset in two different markets, are called arbitrage opportunities. When you are simultaneously buying and selling the same product in different markets and locking the price differential, it becomes your clear gain, after adjusting for costs.

The mutual fund industry has a separate product category to tap such “mispricing” opportunities—arbitrage funds.

Basics of arbitrage funds

The assets such as stocks or commodities are traded in different market segments, say spot market and the future market.

The spot market is nothing but the segment of market where the transactions happen on the delivery basis and are settled on a cash basis.

Whereas, the ‘future’ is a contract entered by two parties to buy and sell a specified quantity of the stock (or any other asset) on some future date.

The investor has to pay only a certain percentage of the total contract value upfront; which is called margin money.

Arbitrage funds endeavour to take advantage of mispricing of stocks (or a stock index) in the different market segments.

However, these are short-term opportunities which spring up due to lack of information to a set of market participants in one of the markets. Over the period of time, the price differential evens out as these investors learn about the new developments. In this process, others such as arbitrage funds benefit by locking gains which are equal to the initial price differential.

The arbitrage funds are treated as equity-oriented funds for the purpose of taxation and therefore they predominantly invest (about 2/3rd) of their assets in stocks presenting arbitrage opportunities and the rest are invested in debt and money market mutual funds.

However, the funds can step up their investment in debt and cash in the absence of adequate arbitrage opportunities. They are often promoted as a better alternative to money market mutual funds. Let’s see how they performed in reality.

What are the advantages of arbitrage funds?

1. Since the buying and selling of the same asset happens simultaneously, returns of these funds are highly predictable as compared to equity oriented mutual funds.

2. There’s minimal risk involved.

3. Ideal for parking money for the short-to-medium term—say for 1-2 years.

4. A good alternative to keeping money idle in the savings bank account.

And the disadvantages of arbitrage funds are…

1. The performance of arbitrage funds depends on the availability of arbitrage opportunities. When there’re fewer opportunities, arbitrage funds work similar to short-term debt funds.

2. Because arbitrage opportunities are short-lived, arbitrage funds are subject to heavy portfolio churning. Higher transactional costs increase their expense ratios substantially.

3. Since there’s a 10% Long Term Capital Gains Tax (LTCG) on arbitrage funds for gains above Rs 1 lakh in a financial year, arbitrage funds have become unattractive for big-ticket investments.

[ Read: How LTCG Tax On Equity Investments Can Derail Your Financial Plan]

Should you invest in arbitrage fund?

Across timeframes—(1,2,3 years)—arbitrage funds haven’t generated negative returns.

Importantly, there’re hardly any outliers, which means, the performance of all arbitrage funds, irrespective of who’s managing them, is more or less the same.

This suggests that most of the fund houses are equally efficient (or inefficient) in finding out arbitrage opportunities.  

Therefore, for satisfying the immediate liquidity needs, savings bank account remains unmatched.

But you can still invest some amount of your surplus in arbitrage funds, provided you are willing to take some risks for slightly higher returns.

Arbitrage funds still make sense for short-term investing, especially for those falling under 20% and 30% tax slabs. Equity-oriented funds attract only 15% short-term capital gains tax on realised gains made within one year.

How to select an arbitrage fund?

Only a handful of arbitrage funds have consistently outperformed the rest in the category. Thus, select an arbitrage fund that has outperformed constantly across the timeframe and market cycles and hasn’t exposed investors to any unwarranted risk.

And this holds true while selecting a mutual fund scheme from any category.

The truth is, NOT all mutual funds are good.

Most importantly, not all mutual funds are good for YOU.

Worried if you are holding the best and most suitable mutual fund portfolio?

Get your mutual fund portfolio reviewed by PersonalFN . We will recommend you best the funds keep in mind your needs, investment objective, time horizon and risk profile.

 And mind you, our recommendations are backed by our robust mutual fund research process.

 Hurry, opt for PersonalFN’s mutual fund portfolio review NOW!

Creating Wealth Is Possible For Everyone (Not Just For Rich)

Stock markets and race course aren’t for middle-class people like us.

We can’t lose money.

Sunil argued with his wife, Sanjana, who asked him why they didn’t invest in stocks and mutual funds like her friends, Asmita and Mohit do.

A few days ago, Sanjana had met Asmita at a mutual friend’s birthday party.

On being asked about what she was upto those days, Asmita surprised everyone by saying she’d picked share trading as a part-time profession. In fact, Mohit supports her a lot in her attempts to make a quick buck. Mohit is a rich business man and he’s proud of his wife for trying to multiply his wealth.

In contrast, Sunil works in a small private limited company that pays him moderately.

Since that day, Sanjana has been pursuading Sunil to give her some initial capital. She feels trading in shares can lessen Sunil’s financial responsibilities.

To read more, please click here.

6 Symptoms Of Bad Financial Health

Fever, chills, muscle aches, cough, congestion, running nose, headaches and fatigue are common symptoms of flu. During monsoon even dengue and malaria, are common.

We take necessary precautions such as avoid outside food, drink boiled water, keep our surroundings dry and clean and so on.

But do you know that there are some evident symptoms which reflect bad financial health as well?

Yes, bad financial health.

As much as you need to be physically healthy, being financially healthy is equally important.

To read more, please click here.

Does AUM Size Affect Mutual Fund Performance? Here's What You Must Know…

Here’s a subject most fund managers are reluctant to speak about. The sole reason is that the asset size of the fund drives their earnings. Some may shrug it off on the basis that there is no correlation.

However, the effect of the fund size of mutual fund performance is a growing concern, especially in light of massive inflows that have increased the mean size of funds in the recent past.

Over the past three years, investors have dumped over Rs 3 lakh crore of assets in the hands of equity mutual fund managers. The total AUM managed by equity-oriented funds has more than doubled to Rs 7.41 lakh crore in May 2018, from Rs 3.65 lakh crore in May 2015.

To read more, please click here.

Get the Best Robo Advisor To Help You Accomplish Financial Goals

Manoj and Mehek are excited to visit Europe.

But, Manoj isn’t happy with the tour package deal they got.

According to him, they are likely to shell out approximatley Rs 1.5 lakh extra as compared to what typically a couple would spend on a Europe tour.

Last minute arrangements have cost them a pretty penny.

The right approach to financial planning is extremely crucial.

Had Manoj and Mehek saved Rs 1.5 lakh by planning their tour well in advance, they would have effectively added Rs 14.5 lakh to their retirement kitty.

To read more, please click here.

From Top 200 To Top 100, Can Reliance Large Cap Fund Still Reward?

Reliance Mutual Fund has recategorized its popular Reliance Top 200 Fund to a large cap fund, and renamed it as Reliance Large Cap Fund (with effect from April 28, 2018). The fund will now focus on top 100 stocks by market capitalization.

Launched way back in 2007, as Reliance Equity Advantage Fund, the fund had a broader investment mandate where it could invest in stocks across market caps, although with a large cap bias. However, effective August 23, 2012, the fund was renamed as Reliance Top 200 Fund, while its investment universe was restricted to stocks present in the S&P BSE 200 index or the top 200 stocks by market capitalisation.

To read the complete note, click here.

The Best Value Funds For 2018 — Don't Rely On Mutual Fund Categorisation

PPF v/s Mutual Funds: Which Is Better?

Arbitrage: Arbitrage is the simultaneous purchase and sale of an asset to profit from an imbalance in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms. Arbitrage exists as a result of market inefficiencies and would therefore not exist if all markets were perfectly efficient.

Quote: "I have found that when the market's going down and you buy funds wisely, at some point in the future, you will be happy. You won't get there by reading. Now is the time to buy”‒Peter Lynch