Arbitrage funds have gained popularity among investors due to its favorable tax treatment ever since Union Budget 2014 tweaked taxation rules that favoured them. This is evident from the fact that arbitrage funds is now 33% of overall net inflows in equity funds.
AMFI data shows that of the Rs.46,000 crore of net inflows in equity funds, Rs.15000 crore has come through arbitrage funds in April-December 2016.
The data further shows that arbitrage funds constitute 35% of gross sales under equity schemes. In fact, AUM under arbitrage funds stood at Rs.37,891 crore out of 419,562 crore in equity funds as on December 2016 which is about 9% of total AUM under equity schemes.
Many distributors believe that arbitrage funds are a better alternative to liquid funds and ultra-short term funds. Investors having investment horizon of 6-18 months should consider arbitrage funds to get better tax free returns, they said.
Manoj Nagpal of Outlook Asia Capital observes that arbitrage funds have been delivering 6-7% post tax for the last one year. Since arbitrage funds have to maintain 65% exposure in equity, these funds are treated as equity funds. The chances of an investor making better returns from the arbitrage strategy increases with the increase in holding period.
However, many corporate investors invest in arbitrage funds for tax planning purposes.
“FII and Institutions are big players in the arbitrage funds. Retail investors do not find these funds attractive as they don’t view equity funds as a tax-planning vehicle. In my view, this category will gain popularity among retail investors in future because of the declining interest rates in the market,” added Nagpal.
However, a few experts have a different view. DP Singh, CMO SBI Mutual Fund said, “Arbitrage funds do not work well in all markets. These funds perform well only in volatile markets. Most of the corporate investors look at the spread between cash and future markets to invest in arbitrage funds. Hence, one can say that inflows in arbitrage funds is subject to the spread between the cash and future markets.”
