Why are arbitrage funds gaining popularity with investors?

economictimes.indiatimes.com:

arbitrage funds, pouring in as much as Rs 10,074 crore in July, with cumulative flows rising to Rs 23,800 crore this financial year. The inflows reflect high returns and better taxation treatment these funds offer compared to debt plans.What is an arbitrage fund? How does it generate returns?An arbitrage fund seeks to generate returns on the price differential in the cash and futures market. In such a scheme, the fund manager simultaneously buys a company in the cash market and sells an equivalent quantity in the futures segment as long as the futures trade at a reasonable premium. The spread between the two generates the return for the scheme. The fund does not take any naked exposure to any individual security or an index as each buy transaction in the cash market has a corresponding sell transaction in the futures market. While 65% of the corpus is allocated to arbitrage products, the fund manager is free to choose the balance of 35% between arbitrage or debt products, depending on his view on the market.Why is it gaining popularity with investors?High returns compared with savings accounts and better taxation are driving investors to arbitrage funds. Rich investors also prefer these funds as they are treated as equity funds for taxation, which significantly increases post-tax returns. Investors holding for less than a year pay 15% capital gains tax, while if they sell after a year they pay only 10% long-term capital gains tax for gains above Rs 1 lakh. Compared to this in a debt fund, rich investors have to pay short-term capital gains tax at 30%.

Best MF to invest

Looking for the best mutual funds to invest? Here are our recommendations.

What are the risks of investing in this scheme?Arbitrage funds rank