Arbitrage Funds’ Performance
Big mutual fund houses like Axis, Tata, UTI, Invesco, HDFC, DSP, L&T, and the like offer arbitrage funds. However, despite being managed by some of the best arbitrage fund managers in India, not all arbitrage funds provide similar returns.
So, you must check the historical performance of the best arbitrage funds before picking one or more funds to invest in. Also, analyzing a minimum of three years’ data is wise to arrive at a solid conclusion.
Generally, if a fund performs decently for three to five years, it is believed that the momentum will also continue in the coming years.
Comparison With The Benchmark
Benchmark refers to the average returns offered by the underlying stocks or financial instruments the benchmark is composed of. The benchmark shows the status of the index or the sector it tracks.
For instance, if the benchmark S&P BSE Information Technology TRI increases, it proves that IT sector stocks are attracting investors’ interest. Funds are compared vis-a-vis the benchmark it follows. Generally, arbitrage funds’ performances are measured against the performance of the NIFTY 50 Arbitrage TRI.
Remember, the best arbitrage funds are the ones that consistently outperform the benchmark. Also, you may invest in funds that outperform the benchmark and the category.
The Expense Ratio
The expense ratio refers to the fee mutual fund houses charge to manage investors’ capital assets. They use the amount to cover their establishment costs. However, since the expense ratio reduces the investor’s profit margin, it is imperative to evaluate the ratio to maximise profits.
The Securities and Exchange Board of India (SEBI) has laid detailed guidelines on the expense fees mutual fund houses can charge customers. It specifies the maximum expense ratio fund houses may levy on specific fund types. However, fund houses or AMCs (Asset Management Companies) often charge lower expense rates than the SEBI-set limit to attract customers.
Before investing in the best arbitrage funds, it is wise to evaluate the expense ratio. Generally, the arbitrage fund expense ratio hovers between 0.30% and 0.45%. Remember, the lower the expense ratio, the more capital invested in the market. Hence, a lower expense ratio might increase your profits as well.
Taxation
Arbitrage funds are considered equity funds for taxation. So, if you hold your investment for more than a year, you must pay an LTCG (Long Term Capital Gains) tax of 10% + surcharge + cess on the profit. However, if you sell your investment before one year from the investment date, the STCG (Short Term Capital Gains) tax rate will be 15% + surcharge + cess. It is wise to note that you have to pay INR 0 if your LTCG is less than INR 1 lakh in any financial year.
So, before investing or withdrawing money from an arbitrage fund, calculate your taxes to maximise your income.
Financial Goals
Despite being classified as equity funds and taxed accordingly, arbitrage funds are not always as remunerative as pure equity funds. But, arbitrage funds are typically more stable and less volatile than pure equity funds. So, arbitrage funds are best-suited for investors with a long-term investment horizon. Tracking the past performance of the funds can give you an idea about the returns you may expect. Hence, tie your arbitrage fund investments with a financial goal and invest accordingly.
Exit Load
Exit load refers to the amount mutual fund houses charge for allowing withdrawals before a specific date from the investment date. Arbitrage funds’ exit load generally ranges between 0.25% and 1%. Check the exit load to make sensible investment decisions.
Fund Manager’s Expertise
Arbitrage funds are usually more complicated than standard equity or debt funds. So, the fund manager’s expertise plays a massive role in determining the returns. Generally, Indian mutual fund houses assign arbitrage fund management to the best fund managers. However, it is still wise to check the fund manager’s track record before investing in the best arbitrage funds.