Invest in Arbitrage for short Term

Best SIP Funds to Invest Online 

Equity arbitrage funds, a sub-category that offers 'debt like return and equity like taxation benefits', have also been hit by the new tax. The returns from equity arbitrage funds are comparable with those of short-term and ultra-short term debt funds. Investors, especially HNIs, used to park their short-term funds in these funds to gain from the tax advantage. While debt fund investors were forced to pay a dividend distribution tax of 28% (ie 25% plus 12% surcharge), there was no dividend distribution tax (DDT) here. 

* 25% + 12% Surcharge + 4% cess
# 30% tax + 15% surcharge + 4% cess for upto 3 years; 20% (with indexation) + 4% cess after that. If we assume 8% returns from debt funds and 5% inflation rate, inflation adjusted tax will be only 20.8% of 3% (ie 0.624%). and on the original gain of 8%, the effective tax rate works out as 7.8%. Data as on 5 Feb 2018 

Similarly LTCG were tax free here after a year of holding, while debt fund investors paid 20% tax even after holding for three years. Though equity funds will now be subjected to LTCG tax and DDT, experts say the arbitrage funds are still the best option to park short-term funds. Though the sheen has reduced, equity arbitrage funds continue to generate better post-tax returns than other alternatives 

The tax rate is still attractive for equity arbitrage funds. While debt funds investors pay a total DDT of 29.12% after 1 April, it is only 10.4% for equity arbitrage funds. Similarly, the tax advantage is huge for the 1-3 years holding period also. The tax arbitrage differential will come down, but equity arbitrage funds will still remain a good option for short-term investments. Besides, the sudden increase in stock market volatility, triggered by the imposition of the LTCG tax and DDT on equities, is good news for arbitrage funds. The arbitrage opportunity is greater during periods of increased volatility. Usually, carry costs are low when the market is extremely bullish. Risk premiums will be higher in volatile periods like this 

However, the arbitrage opportunity may come down if the correction continues for very long and investor interest in the market wanes. In arbitrage funds, the dividend option makes more sense. The tax rate on short erm capital gains is 15% while dividends will be taxed at 10%. Since there is a tax advantage of 5% in the first year, the dividend option is better 

Arbitrage funds make money by buying and selling in different market simultaneously to corner the price difference. Their risk profile is comparable to that of debt funds. However, these funds can be very volatile in the short term (less than three months). Since NAVs can fluctuate wildly for short holding periods, the ideal investment horizon for this segment is 6-12 months 

SIPs are Best Investments when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich - Best ELSS Funds

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