Top Arbitrage Mutual Funds to Invest in August 2024
You are thinking of parking your money for a year or more and want the best returns after taxes. If so, then arbitrage mutual funds may be the answer.
Arbitrage funds take advantage of mispricing between the cash and the derivatives market. The fund manager actively looks out for those instances where he can buy in one market and sell in another to make a profit. In the event that such arbitrage opportunities are very few in number, then the fund will also have an investment in debt securities and equities.
Arbitrage funds are taxed as equity funds. Provided you stay invested for more than a year, it qualifies as long-term capital gain tax at 12.3%. If it is less than a year, then short-term capital gains tax at 20% will be applicable.
Funds turning around in fundamentals can do better in a volatile stock market as it opens up more arbitrage opportunities. Interest rates do not impact these funds, and hence, if you have to avoid interest rate risks, these funds are a good bet.
Moreover, at times there may not be too much scope for arbitrage, especially when the market goes up or down steadily. In contrast, a volatile market throws up more opportunities for arbitrage.
Best Arbitrage Funds to Consider in August 2024
The two arbitrage funds suggested for short-term investments are:
- Kotak Equity Arbitrage Fund
- Nippon India Arbitrage Fund
Both the above funds have been consistent in performance, and we see no reason for a change in our recommendations this month. Please ensure to check updates on the current performance of the chosen funds.
How do We Choose the Best Arbitrage Funds?
This is a brief summary of some of the factors used to filter these funds:
1. Mean Rolling Returns: We take trailing daily returns for three years.
2. Consistency: We use the Hurst Exponent as a measure for how smooth the returns of a fund have been. The higher the consistency, the less volatile the fund is.
3. Downside Risk: It measures the negative returns of the fund that is how much it loses in a slump.
4. Outperformance: In the case of equity, we use Jensen’s Alpha as the parameter to measure how well the fund has done and what the market expects of it. For debt, we compare the fund’s return with that of a benchmark.
5. Asset size: We only consider hybrid funds with at least Rs.50 crore in assets.
Conclusion
Arbitrage mutual funds are appropriate to help you make intelligent short-term investments in a volatile market. You can get better after-tax returns while reining in risk with a well-chosen fund.
